Social Security Reform in 2009?

Finally, a politician accidently tells the truth.

U.S. Social Security overhaul unlikely before 2009

By Donna Smith
WASHINGTON, Nov 8 (Reuters) - President George W. Bush's failure to win support for individual Social Security investment accounts means the U.S. Congress is unlikely to address the retirement program's long-term financial problems before 2009, a senior U.S. senator said on Tuesday.

Charles Grassley, the chairman of the Senate Finance Committee, told a business group he is unable to win agreement for a Social Security overhaul even among his fellow Republicans on the tax writing panel. Democrats remain fiercely opposed to Bush's initiative. "I am very pessimistic about it in the future," Grassley told the U.S. Chamber of Commerce. "Probably the next bite at Social Security will come in 2009."

Why will it be any different in 2009?

One very good reason. In approximately that year, the so-called SS 'surplus' will peak. This 'surplus' is nothing more and nothing less than the amount by which current payroll taxes exceed the current mandated SS payouts. These excessive tax collections could only ameliorate the future difficulty of meeting future mandated SS payouts if they were used to reduce the Federal debt held by the public, broadly defined.

However, the reality is that the excess collections are 'borrowed' by Congress to support current spending and accounted for by creating government to government debt held in the SS Trust Fund. In fact, empirical studies have shown that every 'surplus' dollar is overspent by Congress by 1.76 times, actually making it more difficult to meet future mandated payouts as debt held by the public is increased as a result of the excessive current payroll taxes.

It seems to me a safe prediction that, in or about 2009, Congress will act to increase current payroll taxes because it will be much easier than reducing spending, which would otherwise be required as the 'surplus' peaks and starts to decline.

In any future year, difficulties with Social Security are entirely encapsulated by that year's shortfall in payroll taxes with respect to mandated payouts in the same year. Presumably future payroll tax rates will be increased as part of the 2009 current payroll tax increase, but this will only be political cover, not its purpose. Of course, by simply increasing the payroll tax burden on future workers, any projected shortfall can be eliminated with the stroke of a pen, as long as enough future workers exist.

What about the contents of the magical Social Security Trust Fund? The reality of the SSTF is that it is nothing more than a subject for the contrasting lies of the two political parties and their sycophants.

The Democrats claim that the pseudo-bonds held in the SSTF can be redeemed to make up for future SS shortfalls. This is literally true, but misleading. Assuming no changes in tax rates or structure, the redemption of the pseudo-bonds will be accomplished by converting them to new debt held by the public. The amount of the new public debt created will be equal to the SS shortfall in any given future year for which the SSTF has not yet been exhausted.

If the SSTF has just been exhausted, then a future Congress will have two choices.

One choice is to do nothing. In this case the SS payouts will be cut by something like 28% and the previous year's requirement to create new public debt to redeem the SSTF's pseudo-bonds will vanish.

The second choice is to authorize new borrowing in the exact same amount as if the SSTF had not become exhausted. It seems to me that this choice is a political no-brainer, and thus entirely appropriate for Congress.

The Republicans, alternately, tell a different lie. Although many of them correctly recognize that the existence of the SSTF is of no economic relevance for the purpose of dealing with future SS shortfalls, they illogically try to support their 'solutions' by claiming a crisis in the solvency or bankruptcy of the SSTF. Social Security can be neither solvent nor bankrupt. To claim otherwise is simply political spin.

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