Ride the Third Rail

“What a year! The world’s first full-color feature film has been released.” In the wings are film adaptations of two new books, Gone with the Wind and the Wizard of Oz. The hot new entertainment medium is radio and fully two thirds of American homes have one, roughly the same percent of homes that are electrified. In a few years we can expect to receive radio-like signals on boxes known as televisions that will reproduce tiny pictures as well as sound. “It remains to be seen if there will be any consumer demand for such a novelty.” With American family median yearly income reaching $1000, Ford’s new Model-A priced at $695 is becoming a must have for many families.

But the news is not all so good. In Germany Hitler has withdrawn citizenshipfrom the Jews. American liberals seem to be hypnotized by Bolshevism. After the misery of the First World War, 94% of the public want us to stay out of all future wars. Thousands of children will be crippled with polio this year. Nearly a third of the US population is quite poor. And the average life expectancy is only 59 years.

However, hope is on the horizon. In August President Franklin Roosevelt pushed through Congress a universal government-paid pension as part of the Social Security Act. Benefits will commence when you reach 65, but most of us will be dead by then. In fact, there are now 65 workers paying into the trust fund for every retiree receiving payments. That trust fund balance must really be growing!
The year is 1935.

[The above excerpts are from “Take Ownership” by Karl Zinsmeister in the recent issue of The American Enterprise.]

How the times have changed. In the beginning workers paid 1% of their wages in payroll tax (Social Security) and employers matched the 1%. Today workers and employers together pay 15.3%. And there are only 3.2 workers for every one of the 47 million Americans receiving benefits. That ratio will continue to decrease and by 2018 the amount coming in will be less than the amount being paid out. I guess that is when the Government will have to start drawing down the trust fund. There must be gobs of money in the fund even if it was kept in a lock-box and lots more if it was put into a bank account and muy mucho more if it was invested in the stock market. Imagine 70 years of compound interest or stock market gains.

But, oh no! Those rascally Feds did not invest or even save the money. They spent it! The Social Security “trust fund” contains 70 years of government IOUs and there will be hell to pay when the flow becomes negative in just 13 years.

Well, how bad can it be? A few numbers shall reveal all. Everyone worries about the national debt, especially the $4 Trillion owed to the folks who own savings bonds. That so-called Federal Debt is huge, about 32% of Gross Domestic Product (GDP). But it turns out that the % of GDP has averaged 31% since 1965, with a low of 18% in 1974 and a high of 44% in 1993. Thus 32% is hardly a catastrophe. However, the projected Social Security debt is another kettle of fish. A 2003 study by the American Enterprise Institute (AEI) shows that the present-value, unfunded obligations of Social Security amount to $7 Trillion!

Imagine that you are a worker in your 50s, with 30ish children and grandkids in grammar school. In 2018 you will be retired and collecting Social Security. Your kids and grandkids will be working, paying Social Security taxes PLUS an extra tax (starting at $200B per year) to cover the unfunded amount due to all you retirees. And it will get worse every year. What a nice legacy for your family.

The Medicare situation is even worse than that. The same AEI study shows that the present-value, unfunded obligations of Medicare amount to $36.6 Trillion!! That is over 4 years of the U.S. GDP.

So perhaps we ought to grab onto that “third rail” and try to fix the problem. President Bush has gambled the political future of the Republican Party on just that.