Whose Ox will get Gored?

President Obama established the National Commission on Fiscal Responsibility and Reform in February 2010. In December 2010, the Commission, co-chaired by former Clinton Chief of Staff Erskine Bowles and former US Senator Alan K. Simpson of Wyoming, released its report. The report included a comprehensive set of recommendations all designed to help the United States address its growing deficit problems and the mounting national debt. But, most controversial of all recommendations, the Commission had the temerity to suggest that, unless they are fixed soon, entitlement programs such as the Social Security System are doomed to financial failure.

In his usual fire-brand style of down home wit and brazen Western honesty, Senator Alan Simpson has never dodged the tough issues and some of his recent comments regarding Americans and Social Security have touched off a firestorm. Without regard for his specific words, give Al credit for taking on the elephant in the room. But, while we’re on the subject, let’s address some of the myths associated with this elephant in the room.

One of the common misconceptions about the Social Security System is that Congress has raided the Social Security Trust Fund and spent the money funding the current budget deficits. This is over-simplified at best and in many respects just not true. However, as is usually the case, the matter of accounting for the Social Security Trust Fund is too complicated to be adequately explained in this column. But, it deserves a better explanation than typical news sound bite, so let me give it a try.

When passed and signed into law in 1935, the Social Security Act established a system for collecting payroll taxes, keeping the money in a trust fund, and providing retirement assistance for the elderly as well as disability insurance for all Americans. The key to understanding the trust fund is that the Social Security Act requires that all Social Security receipts be invested in United States Treasury Bills and that the interest accrue for the benefit of the trust fund. US Treasury Bills are the debt instruments that our government uses to finance government operations and deficits. The challenge here is that in this particular case the United States is both the lender (the Social Security Trust Fund) and the borrower (the US Treasury).

Certainly, in these times of record deficits and a national debt approaching $14 trillion, many people are wondering at what point is the United States Treasury in danger of defaulting on its debt? However, for now, what is important for every American to know is that the Social Security Trust Fund is fully accounted for within the federal budget and the fund is accruing interest for the benefit of present and future recipients.

The notion that Congress has raided the fund comes from a not well understood nuance of the federal budget process. When preparing and reporting federal budgets, both the President and Congress designate certain budgetary items, such as the U.S. Postal Service and the Social Security System, as “off-budget.” This means that the receipts and outlays associated with these programs are not part of the annual budget appropriations process and are accounted for separately. However, when reporting the total budget of the United States, the receipts and outlays for off-budget programs are included in the totals. During the past and even currently, Social Security Trust Fund receipts exceed outlays, thus including the Social Security System in the total budget has the net effect of making the deficit appear smaller. This is what leads some people to suggest that Congress has raided the trust fund, but that statement simply is not true.

Now, let us consider some of the actuarial facts about the Social Security System. Since inception in 1935 until today, receipts have exceeded outlays, and accordingly, the trust fund together with interest has grown. Based on current population numbers, the size of the work force now and in the future, and the expected increased life expectancy of Americans, analysts believe the Social Security Trust Fund will continue to grow until around the year 2025. At that point in time, outlays will begin to exceed receipts, including interest, and the trust fund has been estimated to become insolvent, bankrupt, broke by about 2042, with some more recent estimates as early as 2037.

We can say what we want about how much you and I have paid or will pay into the system. We can make all the platitudes we want about how we are entitled to our Social Security retirement. But, none of that will have any bearing on the fact that, as currently funded and allocated by law, the Social Security System will be broke within our children’s life times. We may not want to see the retirement age raised or our benefits reduced, but where is the equity for our children and grandchildren who will pay into the system for decades and see nothing in return.

We may not like it when the likes of Al Simpson tells us “Where the pigs eat the cabbage” with respect to Social Security, but turning a deaf ear and a blind eye to the inherent and systemic problems with the Social Security Trust Fund will not advance us one wit. When it comes to fixing the Social Security problem, I may not want to have my ox gored, but someone’s ox will certainly get gored sooner or later.

At the risk of exposing myself to ridicule and criticism, I would like to suggest that the sooner Americans get together and help Congress find a way to address the certain and catastrophic failure of the Social Security System the better. And, the least painful it will be for all of us. There have been a number of ideas floated over the years that would make the system solvent into the foreseeable future without gutting current or near-term benefits for recipients. The scared cow will soon be on life support and it will die unless we put our differences aside and make the adjustments necessary to ensure Social Security’s viability for the long term.