Social Security is a Bigger Problem Than People are Describing

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There will be one more blog this week (on Thursday or Friday).


Today is a short blog.  As I mentioned yesterday, I wanted to show you that:

1. The Social Security problem is much bigger than $7.7 trillion I mentioned yesterday.
2. As a result, Social Security is a more significant problem than we recognize.

In yesterday’s blog, I discussed an odd issue…the net liability (primarily from Social Security and Medicare) for the closed group is $52 trillion, but it is only $45 trillion for the open group.  (If you forgot the terminology, you can always look at yesterday’s blog online.)  But here’s a quick reminder: the closed group includes Social Security and Medicare participants who have already reached the age of eligibility as well as people who have been paying in, but have not reached the age of eligibility (current workers).  The open group includes future participants who have not even started paying in yet.


Think about this…when you add in people who have not entered the system (i.e., kids who don’t work yet or children who have not even been born yet, but they will eventually participate in the system), the net liability drops.  I thought that this was really odd.  At first, I wondered if there was already some sinister plan in place to tax future generations more and give them fewer benefits.  But, while that will eventually happen, that’s not what’s going on.


The reality is that the Trustees plan out 75 years in calculating this liability.  As a result, when we count in future participants, we’re counting a lot of people who have not been born and won’t start working for 20+ years.  During the next 75 years, many of them will be contributing but not taking out (i.e., people born more than 10 years from now will not reach retirement age during this 75 year period).  So, when we calculate the liability for the open group, the future participants make it seem like the system is in better shape!


In the case of Social Security, the net liability is $7.7 trillion when you calculate it for the open group.  But, a more realistic picture is given by the closed group (because this captures a fixed group of participants and all of the money that will go in AND all of the money that will go out).  If you just look at the closed group, the net liability is $18.5 trillion!


The open group net liability is only $7.7 trillion because the people who will eventually start working will throw in $18.1 trillion (in today’s dollars) and will only receive $7.2 trillion.  In reality, they will receive a lot more than $7.2 trillion.  In fact, they’ll receive a lot more than $18.1 trillion if the rules don’t change.  But, much of it will be received AFTER 75 years from today.


The point that I’m trying to make is that people often say that Social Security’s liability is $7.7 trillion.  But, that’s a lie. That’s low because it includes the money that will be deposited by future employees, but it doesn’t consider most of the money that they will take out.


I’ve also heard a lot of commentators say that the Social Security problem is minor and the real problem is Medicare. There is no question that Medicare is a bigger problem, but Social Security is also significant.  To see the significance of Social Security, it’s more realistic to look at the $18 trillion net liability.  This is a big percentage of our (approximate) $50 trillion unfunded liability.  It is smaller than Medicare.  But, it’s not a meaningless amount.  In sum, Social Security and Medicare are both huge problems.
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