The Biggest Pension Crisis

Quote of the day:
“He could always write or speak to order, partly from the abundance of the stream, which can fill indifferently any provided channel.”
--Ralph Waldo Emerson, referring to Dr. Oliver Wendell Holmes, Sr.

Newsweek columnist Robert Samuelson has caused a stir once again by writing that the Social Security system, to remain viable beyond the next 30 years, will need attention.

He points out that, in 2005, Social Security, Medicare and Medicaid cost more than two-fifths of the total federal budget. And that will grow to three-quarters of the federal budget by 2030 “if it remains constant as a share of the national income.” He criticizes the government and the baby-boom population for doing nothing and remaining essentially silent on the issue. He recommends benefit cuts, which of course is the least politically-palatable option.

Samuelson makes an important observation when he says “Social Security, Medicare and Medicaid are pay-as-you-go programs. Current taxes pay current benefits. In 2005, 86 percent of Social Security payroll taxes went to pay current retiree benefits.”

This is important because some years the taxes will more than pay for benefits, while other years there will be a shortfall. It depends on many things, but mostly on the size of the tax-paying and benefit-collecting populations. It’s logical that, as the huge baby boom population ages, more strain is put on the system.

The basic, simple, logical fact of pension funding is that some (we hope most) years there will be a surplus, while other years will see a deficit. The basic, simple, incontrovertible necessity in pension governance is to allow surpluses to accumulate, so that deficits will always be covered.

San Diego City, San Diego County and the State of California (and governments across the nation) face significant pension problems because surpluses were seen as a reason either to reduce pension funding or to divert the surplus to another purpose. Sure enough, when the inevitable year comes when benefit levels exceed pension income, there is a serious problem.

As Samuelson says, Social Security is a bit of a different animal, though the basic pension rule does apply. If the system is to continue serving its mission, there will need to be both a tax increase and a benefit decrease. And it will need to be enacted within the next ten years. The longer we wait, the more taxes will need to increase and benefits will need to decrease.