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The Problem With Social Security: An Ever Expanding and Crippling Debt Bubble Facing America
by Bill Bonner and Addison Wiggin, Guest Editorial from Agora Financial
The first public retirement pension scheme was created by Otto von Bismarck in Germany back in 1880.
Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States.
Back then, the number of retired people wasn’t considered a threat to future funding. For example, the life expectancy of American men in 1935 was 76.9. So workers relying on the plan for retirement wouldn’t receive much each month and weren’t expected to live long enough to drain the system.
And when the Social Security system was founded, the typical U.S. retiree at age 65 could expect to live another 11.9 years. But times have changed and we’re facing a crisis…
A Demographics-Induced Debt Crisis
If today’s official projections are right, by 2040, the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full Social Security benefits. And tomorrow’s workers would wait even longer.
In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics…
“When an entire society ages,” suggest Arnott and Casscells, “… the thing that matters most is the ratio between workers to retirees. Unfortunately, the aging of the Baby Boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees – one that will put enormous strain on society and cause friction between generations.”
In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100% to 250% of GDP. It’s essentially a “hidden debt” far greater than official public debt.
And unlike in the private sector, these debts aren’t amortized as expenses over 30 to 40 years. Under normal conditions, economies don’t run such crushing deficits. They only do so in crisis mode.
In 2008, the annual cost of Social Security benefits represented 4.4% of GDP. But by 2034, that number is projected to increase to 6.2% of GDP. We won’t see a decline until 2050 when the figure is forecast to drop to about 5.8% of GDP, where it will remain at that level.
But debt isn’t the only problem…
Healthcare: The 800-Pound Gorilla
In addition to retiring Baby Boomers’ existing doubts and insecurities, U.S. healthcare costs are expected to rise by 7% of GDP over the next 40 years – more than twice as fast as other developing nations.
That’s exacerbated when you consider that the “old old” – those aged 80 and over – are predicted to rise sharply through 2050. This will dramatically increase long-term care costs, as well as disability, dependence and healthcare expenses.
In fact, official projections say that by 2030, the U.S. government will be spending more on nursing homes than it spends on Social Security today.
As Victor Fuchs, an economist who studies the healthcare industry, says: “Although people justifiably worry about Social Security, paying for old folks’ healthcare is the real 800-pound gorilla facing the U.S. economy.”
When you add in projections for Medicare and Medicaid expenditures to Social Security, it could raise the total cost to more than 50% of payroll taxes.
Shoring Up Social Security & Reigning In Reform
Between 2005 and the fall of 2008, we chronicled the efforts of David Walker, the former Comptroller-General of the United States, and Bob Bixby, Executive Director of the Concord Coalition, to shore up the Social Security and Medicare systems and reign in reform.
The project yielded a feature length documentary film – I.O.U.S.A. – which earned us a trip to the Sundance Film Festival in January 2008 and another to the Critic’s Choice Awards in Los Angeles a year later.
We published a best-selling companion book of the same title in late 2008. The numbers we presented in both are truly mind-boggling. But in many ways, the project was dated the moment we released it to the public.
- Medicare: The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of Medicare and Medicaid ever closer.
On May 13, 2009, for example, Medicare Trustees report warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than they predicted in 2008.
The problem is that since last year, the program has paid out more than it collects in taxes, due in part to a deep-rooted recession. In fact, in order for the hospital fund to pay its scheduled benefits over the next 75 years, Medicare would have to deposit $13.4 trillion into an interest-earning account today. That’s $1 trillion higher than last year’s estimate.
As it stands, the program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimate that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.
- Social Security: For Social Security, the reform options are relatively well understood but the choices are difficult. However, the trustees say that while Social Security’s financial standing decreased more sharply than Medicare in 2008, Medicare remains at greater risk of insolvency and a much bigger challenge.
Its cost growth can be contained without sacrificing quality of care… but only if growth in general healthcare costs are more contained. But either way, it’s essential that action is taken soon, particularly to control healthcare costs.
In short, the report concluded that the financial difficulties facing Social Security and Medicare pose serious challenges.
So can the United States hold onto its AAA credit rating?
Uncle Sam’s Grades Are Dropping
“The U.S. government has had a “AAA” credit rating since 1917,” says David Walker, now president and CEO of the Peterson G. Peterson Foundation and quoted in the Financial Times.
But following the release of the trustees report, he continues, “… it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating…
- While comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
- Failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”
Of course, we must note that the whole credit rating business is… well… corrupt. The agencies responsible for dishing out these sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that hung us all out to dry in 2007.
But of course, mortgage-backed securities get an “AAA,” so rest assured… if Wall Street can buy an “AAA” rating, Uncle Sam surely can, too.
But even Moody’s is starting to hedge its bets. It’s since created three subdivisions within its “AAA” rating: resistant, resilient and vulnerable. Look at it as a corporate way of saying, “the good, the bad, and the ugly.” And while the United States isn’t among the worst of the bunch, it’s certainly not the best.
Good investing,
Bill Bonner and Addison Wiggin
Editor’s Note: Having already collaborated on the hit film and book, I.O.U.S.A., plus Empire of Debt and Financial Reckoning Day, Bill Bonner and Addison Wiggin have teamed up again for their follow-up – Financial Reckoning Day Fallout: Surviving Today’s Global Depression.
To view the original article posted by Agora Financial, click here.
- The United States is the New Tanzania? Ugh…
- Your Retirement Plan: Have You Calculated Your Number?
- How to Profit From Health Care Reform… in China
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8 Responses to “The Problem With Social Security: An Ever Expanding & Crippling Debt Bubble Facing America”
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October 16th, 2009 at 8:48 am
I beleave alot of this started with reagen’s trickil down economics FROZE mim wage kept all small working people to learn how to line on half of the cost of items around them Next the War on Drugs then a 2ed trip to IRAQ only 200 billion thats now in the TRILLIONS lets take away our S>S>I> folks will pay more for everything and get Less in their altready megaer checks lets lighten up on folks that make less that 17000$ per person
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October 16th, 2009 at 10:10 am
How about replenishing (pay back) all or at least some of our money taken out of Soc. Sec. after Pres. Johnson signed a bill allowing the gov. to raid Soc. Sec.for other uses. IT WAS OUR MONEY and it should be returned. The Dem., under Roosevelt created Soc. Sec. and then the Dem., under Johnson scuttled Soc. Sec. Almost everything Democrats touch goes sour. They don’t think ahead as to the future consequences that their ridiculous actions create. look at this deficit Obama is creating for future generations to absorb. If only they would think about what they are doing, we’d all be better off.
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david jones Reply:
November 8th, 2009 at 8:40 pm
the politicians need to put a cap on medical costs. with costs costinging 5% more this year then wages, know wonder the working class are getting know where. also adding into 2 wars we can not afford. plus the fact that we have 2 rebuild these countries. keep bringing imagrants into this country and see how far your cost of living will go….. sincerely dc jones
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October 16th, 2009 at 11:03 am
Actually as public programs go Social Security is a huge success. The problem started when Congress started dipping into SS to fund other programs. For instance, if you are receiving SS and have underage children by adoption or your own then you can receive SS payments as much as $800+ per child. Now don’t get me wrong, I think that giving someone receiving SS a financial helping hand is worhwhile but not without a litmus test and not out of SS. That is just one example and there are more examples of Congress dipping into SS money even after the laughable “lockbox”.
Social Security shortfalls can be madeup in a number of ways but the political will is not there. Take off the caps on SS payroll deductions is one way.
George Bush and Conservatives in general have been determined to destroy SS or anything else FDR had a hand in-it’s their mantra and holy grail. Medicare was severly crippled with the “Trojan Horse” drug bill which disallowed Medicare to negotiate prices with the drug companies. I say “Trojan Horse” because it was a blatant attemp to destroy Medicare and like most things Mr Bush and his Cabinant did, give the deed some oxymoronic name thus putting lipstick on the pig. Give Medicate the right to negotiate drug pricing.
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October 16th, 2009 at 3:58 pm
the interesting thing about all the debates on and the exposures of government ineptitudes in managing all of the citizens and LEGAL RESIDENTS of the USA, moneys is that none of the commentators whether it it be the Media ,in all its forms ,bloggers and Financial analysts is that none have mentioned the fact that the attempts to bankrupt America have been planned for a long time and are designed to get the people of the USA and the rest of the world to submit to a big business and CATHOLIC church led group to make us all the same as the citizens of England were before the magna carta was signed all those years ago.the words to describe it are latin and are,,,Ab Ordo Chao
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October 16th, 2009 at 4:52 pm
I agree highly with Tom Pritchard. If all the money would not have been “borrowed”/stolen Social Security would be well and healthy – it should have doubled every 10 years!!!
I feel that Obama’s generation has the attitude – let’s have fun now – we won’t live long enough to enjoy nor pay for it. And with the threat to world peace I cannot blame them. However, somebody will need to come forward and get responsiblity and sanity back into government. Since the damage cannot be reversed we will need a genius.
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October 16th, 2009 at 5:09 pm
The income generated for SS was lost when the US allowed manufacturing to be “offshored” which, true to the design of those permitting it, resulted in fewer emloyees paying into SS; the major impetus behind scuttling the program.
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October 16th, 2009 at 11:02 pm
The second sentence of the third paragraph says, “For example, the life expectancy of American men in 1935 was 76.9.” This cannot be right. It is probably 46.9.
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