Best of Times? Social Security - Not!

Are you counting on social security or any other entitlements to get you through retirement? Robert Freer explains the real facts in the article below and why you need to worry about yourself and your whole family including your offspring.

Robert E. Freer, Jr., President of The Free Enterprise Foundation

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity . . .”

Thus Charles Dickens begins a Tale of Two Cities, the tale of another era of upheaval and societal change. Each generation since our own revolution could say the same. Each has overcome its own unique challenges. Each has known triumph and the euphoria it brings as well as the vinegar of misery brought on by natural or manmade disaster and pestilence. Ours is no different. We have seen incredible advances in science, standard of living, and the prospects within our own lifetimes of overcoming life’s mysteries that have challenged us since the beginning of time.

As we stand on the edge of what could be a golden era in which we and all mankind could benefit, we face only our own human limitations. Man’s dual nature of good and evil continues to stand resolutely before us, unyielding as it has been for eons. This generation’s challenge is not just our relationship with hotspots like Iraq.

As indicated in my last article, we are bedeviled by a Scarlet O’Hara approach to the future. I have news for you. Tomorrow is already here. The Ship of State is much bigger than the Queen Mary. It takes a long time to turn her from her disastrous course. In our last article we looked at what needs to be done to the assault on our borders by illegal aliens that have overwhelmed our ability to absorb them into our society. This week I would like to talk about entitlements.

First a few facts; we are headed towards a permanent change in our demographics. The number of Americans 65 or older will almost double and rise from 12 percent of our population to 20 percent over the next 25 years while what is currently referred to as the “working age population” will only grow by 10 percent during the same time.

According to The Congressional Budget Office, if you assume that that the growth of health care costs does not abate, Medicare and Medicaid will grow by nearly five times as a share of the economy by 2050. They will absorb as much of our economy themselves by 2040 as our entire budget does today. Those figures are for our health care related entitlements only and don’t include social security which, while not as bleak, is pretty bad. Current predictions are that outgo will exceed income around 2017, and the system will be unable, unassisted by general tax revenues to pay full benefits in 2041.

Even under the sunniest of assumptions, government’s share of national expenditures (GNP) within the next 25 years would have to exceed 30 percent to meet its entitlement burden, thus threatening national growth and employment. Increasingly business would be working to meet the government’s obligations rather than building for its future and that of its employees.

Deficit spending won’t work. The demographic changes are permanent and thus as debt grows exponentially, it will threaten our viability as a functioning state. Even now we have seen the percentage of the national debt in the hands of the public grow to 37% and will grow to 46% under a best case assumption by The Congressional Budget Office. The real bad news is that an increasing portion of that debt is foreign owned. Japan holds over 700 billion dollars in our public paper, and China has over a trillion dollars of combined foreign and private sector debt.

We also are not saving. Our national rate of savings has steadily decreased since the early 90s and is now a negative figure and when combined with our government’s behavior, we present a picture of a nation consuming itself like there is no tomorrow.

I am sure I have missed a shocking statistic or two, but you get the point. We either have to trim the programs and the promises they reflect, descend into penury by ignoring the problem or pull together in the best tradition of Americans to work ourselves out of the mess we have created. I have never seen a problem that a committed America couldn’t solve. It is no different here. We are up to it and I encourage you to engage your national representatives about your expectation that they will work in good faith to get it done.

The Medicare and Medicaid programs are worth a column on their own, but before concluding, let me suggest a few ideas for reform of Social Security. It was never intended as anything other than a supplemental income system. Reality today is that it is much more, and for those nearing retirement it must be fixed to assure its sustainability.

For those just entering the workforce and looking at retirement 50 years away, I don’t believe that is so. They have a lifetime to plan and work. I say 50 years because it is increasingly clear those expectations that older Americans are going to take their watch and retirement at 62 or even 65 and enjoy their golden years are badly flawed.

If we readjusted our actuarial expectations for Social Security to those when the program was created, workers wouldn’t be eligible until 75. I wouldn’t propose we do that that, but how about requiring those 25 or younger in 2007 to wait until they are 72? For those 35 or less, we could add a year from age 62 for each year as a transitional strategy to ease the program into place for those who still have an almost 40 years before expected retirement.

To encourage savings early, there should be a super saver rate of five percent or even 0% for capital assets held 20 years or longer. It would most effectively be available to these individuals in partial recognition of the changes we are making in the entitlement age for Social Security benefits. We should also leave in place the shelter amounts for all existing deferred tax recognition programs and their eligible withdrawal date to encourage those who do retire at 62 to have the money useable for that or a new career.

As a final suggestion I would add that while it is fine to index the ceiling for taxation of earnings for social security benefits, I would not materially raise the cap so that it remains but one part of the younger workers’ package of retirement benefits.

Copyright © 2007 by Robert E. Freer, Jr. All rights reserved

About the author: Robert E. Freer, Jr. is President of The Free Enterprise Foundation. He is a Visiting Professor, at The Citadel and elected in 2005 to be their first John S. Grinalds Leader in Residence. A regular contributor to the Mercury, He can be reached by E-mail at The Citadel . Copies of his earlier columns can be found The Free Enterprise Foundation.

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