Many readers may have heard some discussions about Social Security in recent weeks; from the point of view of the great majority of Americans, the proposed "reforms" to the SSA will have a much more dramatic effect on livelihood and well-being than the far more hotly-debated invasion of Iraq. At issue is the alleged insolvency of Social Security. For decades after its inception, the SSA has received more revenues from workers paying in, than it has been required to pay out to retirees. As everyone knows, the amount of time that the average American woman lives after the age of 65 has increased from a statistical mean of 8.9 years (1940) to 16.4 years (1990); for men, the figure has increased by about the same ratio, from 6.8 years to 11.1 years (although the ratio of men to women at retirement age is about .86; source). What this means is that the number of retirees in the USA has roughly quadrupled, while the work force has tripled.

For all this time, the SSA has been spending its surplus on purchases of US Treasury bonds, which have a low yield; as it happens, the SSA owns about $3 trillion in Treasury bonds; according to demographic projections, in 2015, the SSA will cease to run a surplus and will have to become a net seller of Treasuries rather than a net buyer. After that, the ability of the SSA to remain solvent is naturally contingent on the ability of the Treasury to pay those bonds rather than roll them over. While this is mildly unsettling by itself, it's far from evidence that the SSA or the federal government are going to melt down; it does mean, however, that existing projections of future tax revenues are becoming very inadequate. In 2001, CBO projections suggested that the impending "insolvency" of Social Security would be nearly eradicated by raising the cap on SSA contributions from its current $80,400.

However, the problem becomes acutely political when one realized that the current leadership in Washington is determined to make a smaller pool of revenues do more-more highways, more subsidies to farms, pharmaceutical developers, and energy firms, more weapons systems, and more deployments abroad. All this, with a lower stream of revenue. We can fairly guess that this is an ideological commitment that is unlikely to disappear in 2008, perhaps because by then it will have been made irreversible in some way.

If so, Social Security will go bankrupt and so will the US government... unless some method can be contrived to drastically increase the returns on the $3 trillion held by the SSA for future payments. That would, of course, require an unloading of the same amount of bonds on the bond markets, and with it, an immense upward spike in interest rates (at present, interest on the debt is $160 billion annually[*]; if the interest rate rose to its 10-year high of 8%, then debt payments would climb to $660 billion or so per year-more than national defense.) This is never discussed because no one can imagine what the effect of so much debt being dumped on the bond markets would be. However, imagining that it causes the average interest paid out to climb to the 1995 level of 8% seems like a conservative estimate.

Be that as it may, the next issue is to decide how to get a return on that immense volume of debt-heretofore held in US Treasuries-a return so large that when SSA begins running a deficit in 2015, the stream of returns will make up the difference. Logically, I think it would also be reasonable to demand this stream also offset the increased cost of financing the national debt. However, in my next installment I'll discuss the plans for Social Security reform and their rationale.