Continuing the Social Security Mess

The second to the last post reviewed some aspects of the trouble the Social Security system is in. The likely path to solving the problems is unclear, but I suspect that little will be done in the near future to reduce the benefits of social security and more will be done to increase taxes to keep it afloat. There are too many retirees now who remember The Great Depression and/or soaked up its mentally of personal hopelessness and entitlement. There is also the coming onslaught of Baby Boomer retirees who have many, many votes and are keenly interested in ensuring that Social Security will be there for them as they are about to retire. Many of them have otherwise poorly prepared for retirement. So, politically, doing the right things to fix Social Security is very difficult. The Democrats, and for that matter politicians in general, are not wont to do difficult things. In any case, the Democrats believe their reason for being is programs like Social Security, so they cannot give it up. Meanwhile, fixing Social Security will become more and more painful and the tax cost to the younger generations will mount.

In time, as more of the Baby Boomers die and as more young people enter the overtaxed labor market, pressures to reduce Social Security benefits and to raise the retirement age will build. The final outcome will be more severe cuts in the value of benefits than would be the case if something was done to reform it early. The younger generations will press for more opportunities to save their own money for their retirement. They will count less and less on Social Security and it will more and more be seen as a pathetic investment compared to what they can do with their personal investment plans. Interest in Social Security will weaken still further and the benefits will be cut still further. It probably will not vanish, but most people will see it as only a last safety net for the truly foolish who will not invest and save for their retirement or have done so very badly. The tax burden for Social Security will finally begin to fall, though this is likely to be several decades away.

Social Security always depended heavily on having more new taxpayers entering the system than there were people going into retirement. It also depended upon people not living a dozen years or more after retiring. These necessary conditions are now about to be badly violated, so the system will soon be hemorrhaging cash. The voting demographics being what they are, the politicians will remain unwilling to diminish Social Securities benefits for as long as they can get away with it. I expect they may be able to delay dealing in a major way with the problem until 2027, when Social Security has to actually begin drawing down its assets. That is when the government will see absolute decreases in the amount of deficit spending debt that will be financed by social security, requiring substantial increases in general taxes or major cutbacks in non-Social Security programs. Meanwhile, the rapid increases in Medicare costs are going to be an even bigger tax problem for the government. Because of it, there really will be no choice but to decrease Social Security benefits by then. When there is no choice, the politicians will begin to face up to the problem. Maybe.