By Dr. Robert E. Pritchard, Professor of FinanceRowan University, Glassboro, N.J.
Newswise — As a finance professor and senior citizen, I am very concerned about the impact the proposed healthcare reform legislation will have on the future of our Social Security payments. All senior citizens and Baby Boomers should be alerted to Social Security’s impending funding crisis and the impact that passage of the proposed healthcare reform will have on Social Security.
Finally, as detailed below, all seniors and Baby Boomers need to know that their Social Security benefits are not guaranteed! Social Security is a welfare program; lawmakers can take away benefits as easily as they grant them.
The crisis in Social Security has been exacerbated by the deep recession with high unemployment. The latter has resulted in a decrease in anticipated revenues as well as increasing numbers of older workers being forced into premature retirement (less money coming in and more going out).
Although healthcare reform will be necessary down the road, at present Americans simply cannot afford it. It is far more important to meet our current obligations. We must assure the millions of senior citizens and other Americans who depend on Social Security that they will continue to receive their Social Security checks rather than spend trillion(s) trying to reform healthcare.
Social Security is a Pay-As-You-Go Program
All Americans need to understand that Social Security is a pay-as-you-go program. The reason is simple. For many years Social Security taxes have exceeded payments and operating expenses. Each year the excess taxes were spent on defense, interest on the national debt, and other government expenses. Unfortunately, the excess Social Security taxes were not placed in a lock box as Al Gore once suggested.
As the excess Social Security taxes were spent, the Government purchased Government IOUs (equaling the excess Social Security taxes plus some interest). These Government IOUs were used to fund the Social Security Trust Funds. Politicians (of both parties) participated in this.
Now, with a crisis looming, some politicians will tell you that there are trillions in these Trust Funds. It is true that there are trillions of Government IOUs in the Trust Funds. Politicians will try to argue that future Social Security benefits can be paid out of these “paper wealth” Trust Funds. That is simply untrue!
For future Social Security benefits to be paid from the Trust Funds one or both of the following would have to happen. Workers would have to pay additional taxes to convert the Government IOUs into dollars that can be used to pay benefits. This would reduce consumer spending and prolong the recession. Alternatively, the government would have to borrow more money (assuming lenders are available) to redeem the Trust Funds’ IOUs. That will further increase the burgeoning national debt. For practical purposes the Trust Funds are accounting aberrations!
In reality, the amount of Government IOUs in the Trust Funds is not relevant. Your and my Social Security benefits are and will be paid out of current Social Security and, possibly, other taxes. Social Security is a Pay-As-You-Go Program.
With the economic decline, it is expected that Social Security taxes will generate excess receipts only through 2011 or 2012 — not through 2016 as previously estimated. Consequently, it is imperative that we deal with the impending crisis in Social Security now.
Your Social Security Benefits Are Not Guaranteed
Finally, you should be aware that your Social Security benefits are NOT guaranteed. The most fundamental challenge to the idea that Social Security benefits are guaranteed can be traced to the 1960 U.S. Supreme Court ruling in Flemming v. Nestor.
Justice John Hanlan stated that Social Security “was designed to function into the indefinite future, and its specific provisions rest on predictions as to expected economic conditions, which must inevitably prove less than wholly accurate, and on judgments and preferences as to the proper allocation of the nation’s resources which evolving economic and social conditions will of necessity in some cases modify.” Consequently, Social Security benefits are not guaranteed.
Therefore, it is critical to assure the long-tem viability of Social Security before passing healthcare reform legislation. Seniors and Boomers need to know that sufficient funds will be available to pay their future Social Security benefits before legislation is passed allocating scarce resources to other programs.
NOTE: Pritchard is the senior member of the Rohrer College of Business faculty at Rowan University, Glassboro, N.J. He completed both his undergraduate degree in physics and an M.B.A. at Drexel University, his M.A. in applied economics at Wharton and his doctorate in education administration at the University of Pennsylvania. Pritchard has authored/co-authored nine books in the fields of finance, small business management and marketing and has written more than 250 trade journal articles. He has consulted and provided financial training for many businesses and trade associations throughout the United States. Pritchard's research interests include real estate, personal financial management, retirement planning and Social Security. He specializes in applied financial research and pedagogical research principally pertaining to the teaching/learning processes in business and finance. Pritchard lives in Wenonah, N.J.
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