Public
Pensions and Social Security
by
Michael S. Greve
Public
pension systems and Social Security were built decades ago, under very
different economic and demographic conditions. Alas, our political institutions
are lousy at modernizing the system—even when ruin is just around the corner. A
few quick fun facts:
Public
Pensions
Andrew G.
Biggs (American Enterprise Institute) reports that
state and local pensions systems aren’t just woefully underfunded; they’ve also
come to pose much graver risks to state and local budgets.
First, pension assets are now about 143% of
state and local outlays, up from 49% in 1975. Thus, it’s become three times
more expensive for legislatures to amortize funds in down years. Note, in
passing, that the system are no better funded than they used to be. Rather,
they have “matured.” In the 1970s, there were 4.5 public employees per retiree.
Now, the number is 1.75, and falling. Would the last public employee please
turn off the lights? Thank you.
Second, as returns in the bond markets have
evaporated, pension funds have turned to far riskier investments. Increased
volatility means increased risk to state and local budgets. All told, Andy
Biggs estimates that the pension risk has increased tenfold over the past four
decades.
Social
Security
Since
2010, Social Security has been running a sizeable cash-flow deficit, and it
will continue to do so from here to eternity. The deficit is covered from a
“trust fund,” consisting of something like $2.7 trillion in special-issue
Treasury bonds. That money was credited to Social Security in years when the
fund ran a surplus, plus interest. When Social Security runs a deficit,
Treasury redeems bonds in sufficient amounts and sends the money along. As most
everyone knows, this technical account is very misleading: the $2.7 trillion
has long been spent; so we’re really talking about new debt. But there you have
it.
What
happens, though, when the so-called trust fund (or funds—there are two of them,
for old age and disability) run out? According to current CBO projections, that will happen around 2031. (It
could be sooner—e.g., if something bad happens to the economy.) What
then?
What won’t happen is that Social Security stops
cutting checks altogether. It will keep collecting payroll taxes and benefit
taxes. That will suffice to pay around 77% of benefits. (For details seehere.) What of the rest, though?
It can’t
be paid. That’s because the Antideficiency Act (codified in here relevant part
at 31 U.S.C. 1341) prohibits the expenditure of money that Congress hasn’t
appropriated. So, come to think of it, does the Constitution. That’s what the
fictional “trust fund”actually does:
it obviates the need to appropriate funds on an annual basis.
Read the rest at:
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