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MR. MATTHEWS: While Social Security reform is on Washington's mind now, it hasn't always been. Back during the 1980s Washington wasn't paying any attention to Social Security reform, but that doesn't mean that other countries weren't paying attention.
During that time period a small country south of us, in Chile, was looking at revising their Social Security system. Dr. John Goodman, President of the National Center for Policy Analysis was involved with that, counseling them, providing information, working with a group of University of Chicago trained economists who were in the ministries there in Chile, looking at how they could reform their system. Chile was the first country to go to a social security system, it was the first one to move out of it. And so, we have some insight there.
John Goodman has worked on this looking at what other countries had been doing in social security for a number of years, has published a book and several studies through the NCPA on what other countries are doing in order to privatize their system, because all of the other countries that have national social security systems are facing, or were facing the same problems that we are facing now.
Dr. Goodman is here to talk about what's going to happen if we don't do anything. Dr. Goodman.
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Mr. John Goodman
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Thank you. I want to begin by repeating a point that's been made by Steve Forbes and several other speakers, but it tends to get confused in a discussion like this.
Our system is a pay as you go system. Every dollar that's collected in a FICA tax is spent. It's spent the very minute, the very hour, the very day that it comes in the door. No money is being stashed away in bank vaults. No investments are being made in real assets. When today's taxpayers reach the retirement age and look to the government to provide benefits, those benefits can be paid only by imposing higher taxes on future generations of workers.
How high will those taxes have to be?
Well, to get the answer I went to the Social Security Trustees who put out an annual report and tell us exactly what future taxes are going to have to be as a percent of payroll. And what I have on the chart to my left is a result of their intermediate projection. And this projection shows that in the year 2045, about the time when today's college students will reach the retirement age, we're going to need a Social Security tax that is 50 percent higher than the tax we have today. Now if we add on Medicare Part A and we add on Medicare Part B, the trustees are predicting that the payroll tax we'll need will consume almost one-third of workers' income.
Medicare at the time today's college students retire, will consume almost as much as Social Security. For every dollar of Social Security the government pays, another dollar will be spent on medical bills for the elderly. This isn't John Goodman's calculation, these are the intermediate forecasts of the Social Security Trustees. The only thing I have added to this is a small calculation for the other ways the government pays health care bills for the elderly such as the VA system, and Medicaid, and other programs, and the reason I added those in is because the temptation now in Washington is to shift money out of one pocket into another pocket and pretend that we have made some fundamental change.
So I added that to the forecast and discovered that when we move out to the year 2045 we're going to need more than 40 percent of workers' incomes just to pay benefits currently promised into law. That's 40 percent off the top. We haven't built any roads, we haven't built any bridges, we haven't paid any salaries of teachers, or police officers. We haven't put any bread on the table for families -- 40 percent off the top just to pay for elderly entitlement programs.
That's by no means the worst that things can get. The trustees of the Social Security Administration also give us their pessimistic forecast, and on this forecast, in order to pay Social Security benefits at the time that today's college students reach their retirement age, we're going to need twice the payroll tax that we have today. In order to pay Social Security plus both parts of Medicare we're going to need about half of the income of workers at that time. In order to pay Social Security plus both parts of Medicare, plus all the other ways that we pay for health care for the elderly, we're going to need about two-thirds of all workers' incomes in the year 2045. And again, this is by no means the worst that can happen, this is simply the pessimistic assumption of the trustees.
Now what about the trust funds? Well as several speakers have already told us, the trust funds are really unable to pay benefits and I want to emphasize that point. We do put bonds in the trust funds, but every Social Security payroll tax check written by a business is written to the US Treasury, and every Social Security benefit check that's received by an elderly citizen is written on the Treasury. These trust funds are simply a side accounting system. They are fictional accounting systems in the sense that they contain no real net assets for the government. Technically they contain bonds but every bond that's an asset of a trust fund is a liability of the Treasury, and so therefore they net out to zero.
The liberal economist Robert Eisner has made the point that in order to keep the public from worrying so much about trust funds, we could solve this problem with the stroke of a pen. We could, with the stroke of a pen simply double or triple the number of bonds in these trust funds and they would never run out of bonds. But we would not, with that stroke of a pen, change any real economic reality.
On the other hand, another way to dispense with worry about the trust funds is with the stroke of a pen simply abolish them, and that also would not change any real economic reality.
Most countries in the world today that have social security systems that are pay as you go do not have trust funds at all. There is no real reason for us to have a trust fund. But the point to remember is that no bond in a trust fund enhances in any way the ability of the Treasury to pay benefits to retirees. In order for the Treasury to pay benefits to retirees it must collect taxes or it must borrow.
The only thing you can do with bonds in the trust funds is hand them back to the Treasury. You can't sell them on Wall Street, you can't sell them to foreign investors, you can only hand them back to the Treasury. And that does not enhance the ability of the Treasury to pay any benefit.
So, in conclusion, as we look to the future, the trust funds are not going to enable us to pay any benefits. In order to pay benefits government is going to have to go to the taxpayers for higher and higher payroll tax burdens. The only solution is to move quickly to a system under which each generation pays its own way.
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