Social Insecurity and the Coming Intergenerational Battle Over Entitlements
Keith Hazelton
March 23, 2007
Well, there you have it - again. Fed chief Bernanke admitted in Congressional testimony - again - that "deficits do matter" and that changes to Social Security, Medicare and Medicaid will have to be made or dire economic circumstances will result. (See transcript of AP wire story dated 01/18/2007 below.)
In my November 2006 essay Faith Based Money (www.provisionaltruth.org/Essays/2006Q4/faithbasedmoney.htm) , I wrote, "...Bernanke warned Congress in July 2006, 'Deficits matter because they represent additions to debt that our children and grandchildren will either have to pay through higher taxes or reduced services.' Bernanke's key word is “pay,” not borrow more, and the result of higher taxes and reduced government spending generally would be a shrinking economy, which, ultimately translates to a lower standard of living."
The "transfer programs" as Bernanke refers to Social Security, Medicare and Medicaid actuarily are forecast to bankrupt the nation with nearly $45 Trillion of unfunded liabilities in the next three decades as 80 million or so Baby Boomers begin drawing on the wealth transfer tap.
As we know there is no fund or "lockbox" from which to obtain this staggering amount of money, Boomers will be expecting their children, grandchildren and great-grandchildren to fund their retirement and medical expenses through much higher wage withholding and employer matching contributions if no changes are made to the current programs.
Those alternatives are drastic and - at the moment - politically untenable, which is precisely why Dr. Bernanke offered no solutions and deferred to Congress and the White House to make the "difficult choices."
There are seven painful alternatives from which to choose, most likely requiring a combination of several, if not all:
Uncap Social Security employee withholding and employer contributions. The 6.2% rate for both employees and employers is now not withheld for incomes greater than $97,500 for 2007 (the Medicare withholding rate of 1.45% already is uncapped). This would be viewed as a tax increase on higher-income, "wealthy" Americans and on all employers and is estimated to raise $1.4 Trillion over 10 years (not even a dent in the deficit). Reportedly the now lame-duck Bush Administration has engaged in secret bipartisan talks to do this.
Increase the standard withholding rates for both Social Security and Medicare, now at 6.2% and 1.45%, respectively. This would be a tax increase on everyone.
Further delay retirement age benefit eligibility, now 62 for reduced Social Security benefits and as high as 70 for younger Americans. (My full-benefit eligibility date, with a 1956 birth date, is 66 years, 4 months.)
Eliminate the age-62 reduced-benefit Social Security option completely.
Stop indexing Social Security payments to inflation, essentially a benefit reduction (political suicide at present).
Reduce Social Security and Medicare benefits (also political suicide).
Institute a "Means Test" for Social Security and Medicare benefits. This will be the most controversial alternative, which, in effect, will "punish" those Americans who have successfully accumulated or inherited a pile of money deemed sufficient by the Government to deny them any return of the Social Security and Medicare tax money they have paid into the systems over their careers. It will "reward" those who foolishly have saved no money or lost their 401k funds in stock market crashes. Benefits will be scaled from 0% for the very well-off to 100% for the destitute and some percentage in between for the rest of us. So when it's time to visit the Social Security office to begin the process of collecting benefits, in addition to a birth certificate and other ID, retirees also will be required to bring tax returns and audited financial statements of assets and net worth and a government clerk will input your financial data on a computer and calculate what percentage of the "normal" benefit you will be eligible to receive. (And don't try to hide any assets or income! The penalties will be severe.)
I think our children and grandchildren collectively will say to us Boomers, "Sorry about your luck, you should have saved more money when you had the chance. Maybe you shouldn't have bought us all those iPods and X-Boxes and designer jeans and expensive vacations and useless college educations." The next two generations already cynically believe they will see no retirement benefits when it's their turn, and perhaps with valid reason as Dr. Bernanke observed.
What do I know? Send me an email. --Keith Hazelton
January 18, 2007 Transcript of AP wire report
Washington (AP) -- Federal Reserve Chairman Ben Bernanke told Congress on January 18th that the economy could be gravely hurt if the nation's fiscal house is not put in order and Social Security and Medicare aren't revamped. "If early and meaningful action is not taken, the U.S. economy could be seriously weakened," Bernanke said in prepared testimony to the Senate Budget Committee.
It marked the Fed chief's most extensive comments to date on the challenges facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year. This huge wave of retirees will hit the U.S. budget as well as the economy, he said.
Absent policy changes by Congress and the White House, rising budget deficits are likely in the years ahead to increase the amount of federal debt outstanding to unprecedented levels, Bernanke said. That could propel interest rates for consumers and businesses upward, which would be a worrisome development, he said. "Thus a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said.
The budget deficit last year totaled $248 billion, a four-year low. But forecasts call for the deficit to worsen for the 2007 budget year. The Congressional Budget Office is projecting $286 billion in red ink, while the White House is predicting an even bigger shortfall of $339 billion. Bernanke said that economic growth alone is unlikely to solve the nation's impending fiscal problems.
The Fed chief steered away from offering solutions. Fixing the problems, he said, will take persistence and a willingness by Congress and the White House to make difficult choices.
"In the end, the fundamental decision that Congress, the administration and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare and Medicaid," he said.
In my November 2006 essay Faith Based Money (www.provisionaltruth.org/Essays/2006Q4/faithbasedmoney.htm) , I wrote, "...Bernanke warned Congress in July 2006, 'Deficits matter because they represent additions to debt that our children and grandchildren will either have to pay through higher taxes or reduced services.' Bernanke's key word is “pay,” not borrow more, and the result of higher taxes and reduced government spending generally would be a shrinking economy, which, ultimately translates to a lower standard of living."
The "transfer programs" as Bernanke refers to Social Security, Medicare and Medicaid actuarily are forecast to bankrupt the nation with nearly $45 Trillion of unfunded liabilities in the next three decades as 80 million or so Baby Boomers begin drawing on the wealth transfer tap.
As we know there is no fund or "lockbox" from which to obtain this staggering amount of money, Boomers will be expecting their children, grandchildren and great-grandchildren to fund their retirement and medical expenses through much higher wage withholding and employer matching contributions if no changes are made to the current programs.
Those alternatives are drastic and - at the moment - politically untenable, which is precisely why Dr. Bernanke offered no solutions and deferred to Congress and the White House to make the "difficult choices."
There are seven painful alternatives from which to choose, most likely requiring a combination of several, if not all:
Uncap Social Security employee withholding and employer contributions. The 6.2% rate for both employees and employers is now not withheld for incomes greater than $97,500 for 2007 (the Medicare withholding rate of 1.45% already is uncapped). This would be viewed as a tax increase on higher-income, "wealthy" Americans and on all employers and is estimated to raise $1.4 Trillion over 10 years (not even a dent in the deficit). Reportedly the now lame-duck Bush Administration has engaged in secret bipartisan talks to do this.
Increase the standard withholding rates for both Social Security and Medicare, now at 6.2% and 1.45%, respectively. This would be a tax increase on everyone.
Further delay retirement age benefit eligibility, now 62 for reduced Social Security benefits and as high as 70 for younger Americans. (My full-benefit eligibility date, with a 1956 birth date, is 66 years, 4 months.)
Eliminate the age-62 reduced-benefit Social Security option completely.
Stop indexing Social Security payments to inflation, essentially a benefit reduction (political suicide at present).
Reduce Social Security and Medicare benefits (also political suicide).
Institute a "Means Test" for Social Security and Medicare benefits. This will be the most controversial alternative, which, in effect, will "punish" those Americans who have successfully accumulated or inherited a pile of money deemed sufficient by the Government to deny them any return of the Social Security and Medicare tax money they have paid into the systems over their careers. It will "reward" those who foolishly have saved no money or lost their 401k funds in stock market crashes. Benefits will be scaled from 0% for the very well-off to 100% for the destitute and some percentage in between for the rest of us. So when it's time to visit the Social Security office to begin the process of collecting benefits, in addition to a birth certificate and other ID, retirees also will be required to bring tax returns and audited financial statements of assets and net worth and a government clerk will input your financial data on a computer and calculate what percentage of the "normal" benefit you will be eligible to receive. (And don't try to hide any assets or income! The penalties will be severe.)
I think our children and grandchildren collectively will say to us Boomers, "Sorry about your luck, you should have saved more money when you had the chance. Maybe you shouldn't have bought us all those iPods and X-Boxes and designer jeans and expensive vacations and useless college educations." The next two generations already cynically believe they will see no retirement benefits when it's their turn, and perhaps with valid reason as Dr. Bernanke observed.
What do I know? Send me an email. --Keith Hazelton
January 18, 2007 Transcript of AP wire report
Washington (AP) -- Federal Reserve Chairman Ben Bernanke told Congress on January 18th that the economy could be gravely hurt if the nation's fiscal house is not put in order and Social Security and Medicare aren't revamped. "If early and meaningful action is not taken, the U.S. economy could be seriously weakened," Bernanke said in prepared testimony to the Senate Budget Committee.
It marked the Fed chief's most extensive comments to date on the challenges facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year. This huge wave of retirees will hit the U.S. budget as well as the economy, he said.
Absent policy changes by Congress and the White House, rising budget deficits are likely in the years ahead to increase the amount of federal debt outstanding to unprecedented levels, Bernanke said. That could propel interest rates for consumers and businesses upward, which would be a worrisome development, he said. "Thus a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said.
The budget deficit last year totaled $248 billion, a four-year low. But forecasts call for the deficit to worsen for the 2007 budget year. The Congressional Budget Office is projecting $286 billion in red ink, while the White House is predicting an even bigger shortfall of $339 billion. Bernanke said that economic growth alone is unlikely to solve the nation's impending fiscal problems.
The Fed chief steered away from offering solutions. Fixing the problems, he said, will take persistence and a willingness by Congress and the White House to make difficult choices.
"In the end, the fundamental decision that Congress, the administration and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare and Medicaid," he said.
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