Promises, Promises

Can we please have an adult conversation about Social Security?

Source: Wikipedia

The US faces a tsunami of retirement obligations. The Federal Government expends about $1.3 trillion per year on Social Security and Medicare, and takes in about $1.2 trillion. This deficit is covered by their trust funds, which on a combined basis will be depleted 2033—17 years from now. Considered separately, Social Security’s trust fund will last until 2035, not much longer. The Disability Insurance trust fund is just about out of money, and will probably be folded into Social Security, kicking the can down the road. But the road isn’t that long.

Source: Social Security Administration

You can say that we’re running out of savings to pay for retirement, and that’s partly true. On an accounting basis, the trust funds will be depleted. But they’re just part of the Federal budget. We can look at this issue on a present value basis. The present value of promised benefits minus accumulated assets is over $100 trillion. Total Federal revenues are $3.5 trillion, so this is like a family with a $1 million mortgage and $35 thousand income. And the principal payments are starting to come due.

This isn’t a retiree outliving his or her savings that has to get help somewhere else. We’re the somewhere else. There are only three possible solutions: increase taxes, reduce promised obligations, or default. Many think lifting the economy’s growth rate will solve the problem, but there isn’t enough tax revenue for that to work by itself. The deficit is too big. You’d have to grow faster and also raise taxes. And we can’t inflate the problem away. The promises are inflation-adjusted.

Source: Social Security Administration

In New Hampshire we’re blessed right now with presidential hopefuls crossing the state, calling us around dinner time to get our opinions. The pension problem is an issue they often duck, because it means saying unpleasant things about an unpopular subject. But isn’t that what leadership is about—facing difficult problems and making tough choices? I’d love to hear their ideas.

It’s not all that complicated: there isn’t enough money to fulfill all our promises. What are we going to do about it?


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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