Mountain of debt: Social Security crisis looms

By Tom Raum
August 12, 2009

WASHINGTON (AP) - As Congress agonizes over health care, an even more daunting and dangerous challenge is bearing down: how to shore up Social Security to keep it from burying the nation ever deeper in debt.

What to do about mushrooming government payments as millions of baby boomers retire? How about a giant federal Ponzi scheme? That might work for a while.

But wait. That's pretty much the current system. Social Security takes contributions from today's workers and uses them to pay the old-age benefits that were promised to retirees. But there are serious concerns how long that can last.

President Barack Obama has said he'll tackle Social Security and related "entitlement" programs when the health care overhaul is resolved. But the anger and intensity of that debate could complicate his effort.

Failure on health care could make it harder, if not impossible, for Obama to successfully tackle overhauling Social Security, Medicare and Medicaid.

The raucous health care debate is "a bad omen for any change in social policy," said Ross Baker, a political scientist at Rutgers University who's also a former Senate aide.

"People seem to be very fearful of tampering with what already exists. It may be a simple reaction to the uncertainty that's been introduced into people's lives by the recession," Baker said. Still, he said, if not Obama, "some unfortunate president down the road is going to have to deal with it when the crisis strikes."

Although calling Social Security a Ponzi scheme - think of the huge frauds that sent billionaires Bernard Madoff and R. Allen Stanford to prison - may be a bit of a stretch, there is one clear similarity.

As in a Ponzi scheme, the concept works fine at first. So long as there are more new "investors" pumping money into the system to pay off the earlier ones, everyone is happy. But at some point not enough new money is coming in and the scheme collapses.

"We had a remarkable 25-year run in terms of the economy. We had this wonderful demographic holiday where the baby boomers were moving through their main earning years," said William Gale, co-director of the nonpartisan Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.

"Now, the economy's in tatters, the boomers are ready to retire, the world is sick of our debt. The problems are much bigger," said Gale.

With baby boomers working, Social Security - the biggest social spending program - has produced a surplus that has helped finance the rest of the government for the past quarter century. But that will change within a decade.

Trustees of the system recently said that in 2016 - a year earlier than previously forecast - money paid out in benefits will start exceeding the tax dollars flowing in. With no changes, Social Security will be completely depleted in 2037, the trustees said.

Medicare - government health care that now covers 45 million elderly and disabled people - is in even worse shape. It's been paying out more than it takes in since last year and is projected to go insolvent in 2017.

While some economists argue that such doomsday calculations ignore a growing propensity of older Americans to work beyond traditional retirement age, the day of reckoning is fast approaching under any timetable.

Social Security, Medicare-Medicaid, defense spending and interest on the national debt now account for 75 percent of all federal spending. They're on track to one day gobble up the entire budget.

Even if everything goes just right for the administration - the economy recovers, new jobs sprout, housing markets rebound and Congress passes some variation of Obama's health care proposals without sending deficits soaring further - the federal government will still find itself in a deepening debt hole.

Policymakers and economists are hard-pressed to find a way to dig out - short of major tax increases on middle-class and wealthy taxpayers, draconian benefit cuts or an unthinkable default on paying interest on the national debt.

The government said Wednesday the federal deficit reached $1.27 trillion for the first ten months of the budget year, and it's expected to climb to a record high of $1.8 trillion for the full 12 months. Budget years run from Oct. 1 to Sept. 30.

The national debt - the grand total of accumulated annual deficits - is now $11.8 trillion, so high that Treasury Secretary Timothy Geithner asked Congress last week to raise the legal limit above the current $12.1 trillion, a ceiling Geithner said could be reached as early as mid-October.

Congress must allow more borrowing "so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner wrote lawmakers.

Administration officials say the annual deficit was already heading above $1 trillion when Obama took office.

And the long recession has added significantly to the government's debt. Revenues are down at the same time the government is spending hundreds of billions for business bailouts, economic stimulus and two wars.

"This recession reduces the revenue base in a permanent way in the sense that even as you recover, you're now starting from a much lower space. So the recession increases not just the short-term deficit, but the long-term deficit," said Rob Shapiro, a former economic adviser to President Bill Clinton and now with NDN, a centrist think tank formerly known as the New Democratic Network.

Or, as Obama said recently, "We have a steep mountain to climb, and we started in a very deep valley."

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