ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Wednesday, July 31, 1996 TAG: 9607310004
SECTION: EDITORIAL PAGE: A11 EDITION: METRO
SOURCE: CHRISTIAN J. REINHARDT
I HAVE known for a long time that the Social Security program is in deep trouble. As my generation, the World War II baby boomers, becomes eligible for benefits, demand will exceed revenues at current tax rates.
To prove my point, I surfed the net and found a report entitled "Status of Social Security and Medical Programs: A Summary of the 1995 Annual Reports." This was written by the trustees, including Robert E. Rubin, secretary of the treasury; Robert B. Reich, secretary of labor, and Donna E. Shalala, secretary of health and human services.
Briefly, under their expected case projections, the retirement benefits fund is good for 36 years, the disability benefit fund is good for 21 years and the hospital insurance fund (Medicare) is good for seven years. But wait! Last month, The Roanoke Times reported the Medicare funds would run out in five years.
If in less than a year Medicare went from seven years to five years of financial viability, how has the viability of the retirement benefits fund and the disability benefits fund changed over that time?
The report states clearly, "During the past five years there has been a trend of deterioration in the long-range financial condition of the Social Security and Medicare programs and the projected dates of exhaustion in the related trust funds." Further, "the increasingly adverse projections have come from unforeseen events and from the absence of prompt action in response to clear warnings that changes are necessary."
Why has the Clinton administration not moved on this issue?
I am a financial analyst and, in reading between the lines of the above report, I become very concerned. Long-range projections are assumption-driven, and small errors in assumptions result in large errors in projections. The above report includes assumptions about economic growth, wage growth, inflation, unemployment, fertility, immigration and mortality.
The Congressional Budget Office uses what I call static analysis. This means a proposed cutting of the capital-gains tax rate in half results in one-half of the amount of capital-gains taxes being collected. In the past, a cut in the capital-gains tax rate has resulted in increased capital-gains tax revenues. There is a secondary effect of increased economic activity resulting from the tax cut and the more efficient deployment of capital that results in this outcome.
I assume all federal agencies depend on static analysis and ignore the secondary effects, "unforeseen events" mentioned above. Thus, they overlook the largest risk I see for the future solvency of Social Security. The reason is that the "trust fund" is imaginary money earning imaginary interest. When the federal government converts this into real money, many predictable bad things will happen to our economy: higher interest rates, higher inflation rates, reduced economic activity and increased unemployment, to name a few.
To pay this money out, the government either must borrow the money or raise it in the form of additional taxes. If the government borrows the money, the result will be higher interest rates, a simple function of supply and demand. This will likely depress economic and wage growth while increasing inflation and unemployment. If the government raises the funds by increasing taxes, this will likewise depress economic growth and after-tax wage growth, plus other secondary effects.
If the people performing the analysis have overlooked the secondary effects of drawing down the trust funds, the situation will worsen at a faster rate.
There is no easy answer. The best solution is to elect people who will lead the country to higher economic growth rates and create more and better jobs while keeping inflation in check. This will produce higher revenues to pay the anticipated benefits with less of a need to increase tax rates. A balanced budget as soon as possible is an absolute must.
Social Security has huge unfunded liabilities, and will need additional taxes to meet its commitments. Without a balanced budget, additional taxes will be required to pay the higher interest costs, on both the higher principle and at a higher rate, siphoning off available funds to pay retirement benefits.
Because the Social Security program is financially unsound, the report's prediction of "the possibility of a future retirement crisis" will become a reality. I see the day when the Democratic Party becomes the Entitlement Party and the Republican Party the Workers' Party. If the Workers' Party takes over the government...
Christian J. Reinhardt of Roanoke is a turbine-controls sales engineer for General Electric in Salem.
LENGTH: Medium: 83 linesby CNB