This article was published by The McAlvany Intelligence Advisor on Friday, July 24, 2015:
Buried in the annual exclamations of urgency by the trustees of the Social Security system issued on Wednesday was this warning: action by Congress will “give the public adequate time to prepare.” In the short run, some 11 million on Social Security Disability will learn that their benefit checks will drop by $200 a month starting next fall, so they need to get used to that. In the long run everyone receiving anything from the celebrated Ponzi scheme will see their checks go to zero:
It has nothing to do with politics, but mathematics. The iron law of expenses exceeding revenues demands that things will end badly: the bankruptcy of the system.
The DI trust fund has been spending itself down for years, with just 40 percent of its annual expenditures remaining. Simple math dictates that by next fall those reserves will have been reduced to zero.
This will no doubt be a topic of conversation during the run-up to the presidential election, with the predictable conversation from both parties resulting in nothing but noise. Obama has already said he favors borrowing by the DI fund from the Social Security fund because it has all the money. Republicans will mouth niceties about promising to reform the system to “preserve it for future generations” and “keep its promises to our citizens,” etc., etc. In short, nothing will be done and the scheme will continue its slow motion cratering into oblivion.
The reason the DI fund has gotten into trouble so soon is because of the expansion of the definition of disability by Congress in 1984, and the Great Recession encouraging many to use the DI program as their early retirement plan. In 1984 disability was expanded to incorporate not just a specific list of impairments but also much more subjective measures of a person’s ability to work, such as pain and depression. Today, according to Rachel Greszler of the Heritage Foundation, “more than half of all disability awards are given to individuals with musculoskeletal disorders, or mental impairments.”
Or, as Rand Paul aptly pointed out, half the people who are getting disability benefits “are either anxious or their back hurts.”
The entire program is in deficit and has been since 2010. It will continue to be forced to redeem its government IOUs through the Treasury Department until they are all gone. The trustees estimate that that will take about 19 years. And that estimate is based on an increase in Social Security and Medicare and DI taxes by 30 percent over that period.
In reality both the math and the morality of the system are grievously flawed. Mathematically it’s been an elegant Ponzi scheme enforced at the point of a gun. Morally it’s theft: taking wealth from one who earned it and giving it to someone else who didn’t.
The trustees themselves are of little help aside from annual shouts of anguish and urgency. They simply can’t count, according to Professor Laurence Kotlikoff of Boston University. The trustees only count what they can see, coming up with an unfunded liability of between $30 and $40 trillion. Kotlikoff uses his “fiscal gap” accounting, doing present value calculations of both promises made and revenue streams projected, and subtracts one from the other. According to the good professor, the whole Ponzi scheme has put the country’s real debt at more than $200 trillion, with Social Security, Medicare and the prescription drug benefit accounting for most of it.
There is a certain sense of justice in Obama’s suggestion that the managers just continue to support the failing DI program by borrowing from the other parts that still have some of those IOUs left: it will hasten the day of reckoning. That day of complete collapse is estimated by the trustees to be 19 years from now. If Kotlikoff is right, and the Austrian economists who are predicting at least one and perhaps two recessions between now and then are right, it won’t take nearly that long.
In the short run, nothing will change. In the long run mathematics will solve the problem.
U S News: Social Security In Trouble
New York Times: Social Security Disability Benefits face cuts in 2016