Wednesday, March 12, 2014
In 1935, during the Great Depression, the federal government created the critically important Social Security (SS) program to help keep senior citizens out of poverty by providing monthly retirement checks. Today, approximately 55 million Americans mostly aged 62 and older receive pension, disability, survivor, and other social welfare benefits under the SS umbrella.
Last year, approximately $825 billion of benefits were paid, comprising 22% of all federal government expenditures. As baby boomers retire during the next ten years, the number of SS recipients is projected to increase by 40%. Social Security is fiscally unsustainable and must be saved for future generations.
Some of Washington’s most breathtaking financial mismanagement occurs within the Social Security program. Every American worker pays 6.2% of their earnings (on income up to $113,700 per year) into the SS Trust Fund. These “FICA” contributions are normally deducted automatically from worker paychecks. Employers also pay a 6.2% payroll tax and then send both contributions off to Washington.
Even with billions of dollars of payroll taxes streaming to Washington, there is actually no cash in the Social Security Trust Fund to pay the benefits for 55 million Americans. That’s because the United States Congress grabs the SS taxes and spends them before they reach the Trust Fund. In place of the cash, the U.S. Treasury substitutes non-marketable government bonds, or IOUs.
At the end of 2011, there was roughly $2.7 trillion of these special bonds in the Social Security Trust Fund. The Treasury pays the Trust Fund 4.4% interest on these IOUs which is used to help pay the SS benefits. However, the federal government is broke and doesn’t have the funds to pay the interest. So, it borrows money to pay the interest by selling different bonds to investors and countries around the world. In other words, Washington is indebting American taxpayers to foreigners in order to pay itself money it doesn’t have to fund the Social Security checks upon which 55 million Americans depend!
If this fiscal recklessness isn’t bad enough, beginning in 2011, the SS benefits began exceeding the payroll taxes being collected to pay for them. As a result, by 2033, the Trust Fund is expected to have cashed-in all $2.7 trillion of those IOUs to the U.S Treasury in order to have the money to write the Social Security checks. With no more funny-money left in the Trust Fund, by 2033, the ongoing payroll taxes are estimated to be able to fund only 75% of the promised benefits to tens of millions of dependent senior citizens.
What a mess. The day of financial reckoning for Social Security could come much sooner than 2033. What if foreign investors stop loaning us money to pay the pension benefits by not buying our government bonds? Where will the money come from as more Americans retire and the SS benefits consume an increasing share of the federal budget?
The sad truth is that career politicians in Washington have created an insolvent pay-as-you-go retirement “security” program for 55 million American seniors and growing. Looking first to get re-elected, politicians keep promising pension benefits without building a financially sustainable foundation to ensure those retirement checks.
The Social Security program can be fixed and saved for future generations. During my term as Maine State Treasurer, public officials in Augusta worked together to solve a similar problem with the pension plan for thousands of state employees and public school teachers. Rather than continue to kick the fiscal can down the street, we addressed head-on the $4.3 billion shortfall in the pension promises made to retired and active workers. We were honest about the problem and debated reasonable solutions to help make sure the retirement checks would likely be there when needed.
In the end, the necessary reforms included asking new employees to retire a few years later, and slowing down the rate of growth of future benefits. In addition to creating a more secure pension plan for state workers and teachers, we eliminated $1.7 billion of the pension debt and reduced taxpayer contributions by roughly $200 million per year going forward. The legislature then passed the largest tax cut in Maine history, $150 million. These actions started to build a business-friendly climate in Maine in order to attract more investment and jobs for our struggling families.
Public pension systems can be saved for millions of retiring senior citizens. To do so, elected officials must be clear and honest in describing the problems, and work diligently with all parties to settle on real and reasonable solutions. That takes courageous leadership in today’s political climate. If these serious problems are ignored and allowed to grow, budget crises will continue to push taxes higher and retirement benefits will be more at risk.
Next week, I’ll be away from my writing while vacationing within our Great State of Maine. I wish everyone a special Independence Day celebration.
While enjoying time with family and friends, let’s be thankful for the wisdom of our Founders to set the cornerstones for the freest, most prosperous, and most compassionate nation ever to inhabit this good earth. Let’s be grateful for the sacrifices made by generations of selfless men and women who so proudly wore our nation’s uniform and kept us free. Let’s hold 26-year-old United States Army Sgt. Corey E. Garver of Topsham, our recently fallen and highly decorated Maine hero, and his family in our thoughts and prayers during this most difficult time.
Bruce Poliquin is the former Maine State Treasurer and a 2012 Republican primary candidate for the United States Senate. He has 35 years of experience owning and managing businesses. Bruce is a proud third-generation Franco-American Mainer and Harvard University graduate. Visit BrucePoliquin.net for his most recent commentary and analysis on media outlets throughout the State about the important issues facing Maine families and their jobs.