Social Insecurity

February 25, 2004

Alan Greenspan today called on the administration to cut Social Security spending. As the baby boom generation reaches retirement age, beginning in 2008, the government will be forced to spend more to compensate the many new retirees. Greenspan predicted in his speech that Social Security spending will reach 12% of GDP by 2030.

The problem with this impending rise in Social Security spending is that the government is not prepared to handle such an increase. Congress has repeatedly raided the Social Security fund to pay for various programs now, rather than allow the money to earn interest in order to fund the inevitable boom in retirees. Faced with a budgetary crunch of sizeable proportions, the government has few choices, none of them palatable:

1 - Raise the retirement age. Few politicians would dare introduce such legislation given the political clout of the AARP and the typically high voter turnout of senior citizens.

2 - Raise the Social Security tax. Also politically risky. Nobody likes to have their taxes raised; anti-tax Republicans could never support such a measure without risking their support base.

3 - Deficit spending. Borrowing more money, (or simply printing more,) is inflationary and may lead to economic recession. Certainly it would put severe pressure on the dollar, which is very detrimental to the US as a net importer.

4 - Let Social Security default. While some Left-wingers would believe this is part of a grand Republican plot, the political consequences for any elected official who would allow such a well-entrenched entitlement program fail would be suicidal.

Unfortunately, the third option above seems to be the most palatable one from a political standpoint. This does not belie the point, however, that a large increase in deficit spending coupled with a falling dollar would put significant strain on the economy, and cause many other popular and necessary government programs to be underfunded. Unless the Congress can find a way to return to running surpluses, the Social Security system is destined to put a major strain on our economy. With the current makeup of the White House and Congress, such fiscal restraint is highly unlikely.