A Stitch in Haste

Two interesting pension crisis stories hit the tape over the weekend.

First, West Virginia voters rejected a bond initiative to borrow $5.5 billion to shore up their insolvent public employee pension funds.

The defeat leaves in place a 40-year payment plan that relies on ballooning outlays from the state budget to aid the pension plans. This year's payment will take about $350 million from general revenue.

Yet another prequel to exactly the same crisis that will hit the federal government over Social Security funding around 2017, give or take, when the "Trust Fund" is finally, irrefutably exposed as a fraud. The "securities" in -- ironically -- a West Virginia file cabinet, are nothing more than a promise by the federal government to either raise taxes or explode the deficit to replace the squandered Social Security surpluses of today. Just as West Virginia is now suffering the hangover of its public pension recklessness, so too will the federal government, and taxpayers, face the same headache when 2017 comes around.

Incidentally, in case you think West Virginia is an aberration:

The 127 state and local plans tracked by the National Association of State Retirement Administrators suffer from a combined shortfall of $279 billion.

By contrast, the nominal balance in the Social Security "Trust Fund" was $1.7 trillion at the beginning of 2005 (and growing) -- every single penny of which will have to be funded by new taxes or new deficits starting in 2017.

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Second, the House of Representatives engaged in some symbolic wailing and gnashing of teeth over the Pension Benefit Guaranty Corporation, which -- as I have blogged extensively -- is the single best example of what lies down the road for Social Security:

The U.S. House of Representatives voted on Friday to block bankrupt United Airlines from defaulting on its pension plans and shifting them to the nation's pension insurer, the Pension Benefit Guaranty Corp.

Critics said the vote would have no practical effect, because the provision was attached to a government spending bill, while the PBGC does not spend government money.
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"This amendment is absolutely necessary if we are going to stop the dumping of pension obligations on the taxpayers of the United States," said Rep. David Obey, a Wisconsin Democrat. "Without this amendment, Uncle Sam is being Uncle Sucker."

Of course, when Social Security confiscates one-eighth of most workers' paychecks, "Uncle Sucker" may not be a wholly inappropriate moniker. In any event, if the goal is to avoid "dumping of pension obligations on the taxpayers of the United States," then perhaps Congress should be a little more willing to address the fraud of the "Trust Fund," which it created, that will dump the entire value of those so-called "Treasury securities" on taxpayers, again starting around 2017.

The width, breadth and depth of the hypocrisy of Congressional Democrats like David Obey is astounding. The similarities between the Social Security crisis and the PBGC crisis far outweigh the differences. Yet obstructionists dismiss the far larger and far more critical crisis while making inflammatory speeches about the much smaller crisis. Go figure.

The resolution of the paradox of course comes from the immediacy of the PBGC crisis (i.e., "It's all Bush's fault.") while Social Security is tomorrow's crisis (i.e., "It's all Bush's risky scheme to 'fix' what isn't broken.").

Who knows what the political landscape will look like in 2017 and beyond. But one thing is sure:

Somebody will have a lot of explaining to do.

In acknowledgement of Social Security's seventieth anniversary, here's a blogpost of mine that was originally published on January 27, 2005.

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Sometimes opponents of Social Security reform take this sort of tack: "Yes the system faces some challenges based on the demographics of the Baby Boom, but that's temporary. The system itself is a success and should not be fundamentally changed."

Does this look like a success to you?

Year...........OASDI Tax Rate
1937-49.............1.000
1950-53.............1.500
1954-56.............2.000
1957-58.............2.250
1959................2.500
1960-61.............3.000
1962................3.125
1963-65.............3.625
1966................3.850
1967................3.900
1968................3.800
1969-1970...........4.200
1971-72.............4.600
1973................4.850
1974-77.............4.950
1978................5.050
1979-80.............5.080
1981................5.350
1982-83.............5.400
1984-87.............5.700
1988-89.............6.060
1990-2005...........6.200

And of course, your employer has faced those same rate hikes right along with you (or, for the self-employed, those rates are simply doubled).

A "success"?

Need more? Try this:

Year.........Wage Cap
1937-50.......$3,000
1960...........4,800
1970...........7,800
1980..........25,900
1990..........51,300
2000..........76,200
2005..........90,000

I ask again, does this look like a "success" facing a temporary "challenge" caused by the Baby Boom? (Complete annual data here.)

Just one more: here is the product of the two numbers (i.e., the maximum annual Social Security tax a worker had to pay):

Year.....Max Tax
1937.......$30
1940........30
1950........45
1960.......144
1970.......327
1980......1316
1990......3181
2000......4724
2005......5580

If my math is correct, that's almost an 8% average annual increase in the maximum tax paid. Almost 8% more, every year for 68 years, with no end in sight.

I ask yet again: A "success" facing a temporary "hiccup"?

Part of the reason the crisis is now being acknowelded as real is because the politicians are, finally, beginning to realize that Social Security has essentially "maxed out" the possible tax burden (except for those who advocate scrapping the wage cap altogether, which would represent the single biggest tax increase in American history).

Compare and contrast: Some opponents of reform sneer that Medicare is actually in worse shape than Social Security. But of course there is no Medicare "crisis" — yet — because the Medicare tax is "only" 1.45% of wages (again, matched by the employer, but with no wage cap). There is plenty of room for the tax-and-spend crowd to start hiking the Medicare tax rate (which of course will catalyze more generous benefits, and so on, and so on, and so on, until there is indeed a real Medicare "crisis").

In other words, to socialists and redistributionists there's never a crisis until there's nothing left to tax.

POST SCRIPT: Also don't forget the increase in the retirement age, another "tweak" to the "successful" system.

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My Social Security archive can be found here. Those celebrating, either foolishly or fraudulently, Social Security's anniversary include Economist's View, Nitwit Planet.

The Christian Science Monitor:

This demographic reality usually draws a simple political response: raise taxes or lower benefits, or both. In Congress, that way of thinking has led to stalemate on revising Social Security. Both political parties need to discuss a retirement age of at least 70 for both Social Security and Medicare for the next generation.

Excuse me, but raising the retirement age is "lowering benefits." If you're promised a certain stream of entitlement payments, and you don't get all of it, then that's a benefit cut.

I'm not saying raising the retirement age isn't necessarily a more logical option than raising taxes or reducing monthly checks. In the end, now that the obstructionists have won the political battle to block voluntary partial privatization, we are likely going to get all three in some combination.

But the obstructionists must not be allowed to engage in any linguistic gymnastics by pretending that raising the retirement age isn't really a "cut."

"Less than you were promised" is a cut — end of discussion.

More thoughts at Catallarchy.

UPDATE: Benefit cuts — yeah right.

I left something out from my post yesterday about which dials, buttons and levers the government can fiddle with to address the Social Security crisis:

The Social Security Administration also announced Friday that 11.3 million workers will pay higher taxes next year because the maximum amount of Social Security earnings subject to the payroll tax will rise from $90,000 to $94,200 next year. In all, an estimated 159 million workers will pay Social Security taxes next year.

So, with not a single politician or bureaucrat lifting a finger, benefits increase and taxes increase, with no end in sight.

And remember: the claim that "paying more Social Security taxes simply means more benefits at retirement" is a flat out lie. The benefit schedule is specifically designed to be highly progressive -- a 4.7% increase in your Social Security taxes earns you far less than a 4.7% increase in your benefits. In fact, the rate of return of those additional contributions can easily be negative.

And don't forget that employers must match those higher taxes, which means some combination of lower wages to employees, higher prices to customers, or lower returns to investors. (Those who are self-employed know this all too well.)

Anyone still care to suggest that there is no crisis?

My father, who turned 70 about six months ago, is on the verge of reaching another amazing milestone:

He served as a New York City Police Officer for 22 years, and has been retired for 21 years. Soon he will have been collecting an NYPD pension check longer than an NYPD paycheck.

On the other hand, maybe that's not so amazing after all:

[Frank Murray] belongs to an elite fraternity, the estimated 71,000 Americans who are 100 years old or older. And their ranks will grow. The U.S. Census Bureau projects that 114,000 Americans will be centenarians in 2010, a number expected to swell to 241,000 by 2020.
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The average American born in 1900 was only expected to reach age 47, according to the Centers for Disease Control and Prevention. By 1960, he or she could expect to be around until about 70. Life expectancy has gone up steadily since, hitting 75 in 1990. ...[B]etter treatments for chronic conditions such as heart disease pushed life expectancy to about 78 in 2003.

Meanwhile, Social Security still kicks in at 65-67, with an option to collect reduced benefits at 62. Private defined-benefit pensions still generally follow the "twenty years of service" rule.

And people wonder why there's a Social Security crisis, a private pension crisis, and a government pension crisis?

Congress, meanwhile, is stuck on another bridge to nowhere:

Nearly everyone -- business, labor, Republicans, Democrats -- agrees that something must be done to sustain company-based pension plans and make sure that the federal agency insuring them doesn't become a financial basket case. Getting Congress to agree on legislation is another matter.

The Senate, on the verge of passing a bill several weeks ago, has since stalled, unable to come to terms with several lawmakers, backed by business and labor groups, who oppose requiring companies with poor credit ratings to pay more into their pension funds.

Riskier participants should pay higher premiums -- this is somehow a radical concept?

The insolvency and (subsequent taxpayer bailout) of the federal Pension Benefit Guaranty Corporation appears increasingly inevitable, as does some form of "infinite force / immovable object" cataclysm in Social Security now that the Bush Administration has blundered so badly on that front.

Of course, the centenarians who are poised to collect Social Security and pension checks for 40 or more years are not really the core of the problem.

The osteoporosis of a frail old Social Security and defined-benefit pension system, not to mention the feeble-minded dementia of our hack politicians, are the real crises.