Reawakening Virtues: Social Security and The Virtue of Saving

One of the virtues I discuss at length in my new book, Reawakening Virtues: Restoring What Makes America Great is the virtue of saving. It’s interesting these days to see the ongoing debate over the Federal Budget deficit and debt. On the one hand, some are calling for cuts in what many consider to be essential social programs: Social Security and Medicare. On the other hand, some believe that the Government should either go deeper in debt to cover the rising costs of these programs, increase taxes on the wealthy and business, or make cuts to other parts of the budget such as defense. All of these approaches have their supporters and detractors but the fact remains that the underfunding of social security starts and ends with the problem of saving.

Let’s be clear. Social security is not an entitlement program. That is, unlike welfare and food stamps, the people who receive social security have contributed to the program over the course of their working career through payroll taxes specifically designated for the purpose of saving for retirement. They are therefore owed at least the amount of money they contributed.

However, problems started to arise when the Federal government, under both parties, began borrowing from the so-called Social Security trust funds to spend on other items in the budget. The trust funds are not like your traditional private trust funds that are fully funded. In fact these trust funds are empty. The government has borrowed every single dime that comes into the trust funds to spend on current expenditures. We have a problem now because our total national debt is approaching (and may have exceeded) our yearly gross domestic product. Most countries that have this level of debt do not enjoy the high credit rating and low borrowing costs that America currently does.

If we continue to use short term borrowing to fund long term investments we will soon run into trouble. Just look at what happened with the investment banks Lehman Brothers and Bear Stearns. They borrowed in the overnight markets to fund their investments in highly illiquid long term securities. When some of those securities plummeted in value, so did the value of their collateral. Thus, they were faced with a situation in which they needed to borrow money just to stay afloat – but they did not have the asset values to back them up. Each firm collapsed within a week of this situation becoming public.

The political theatre has reached absurd proportions. You had President Obama (and others, including many economists and Treasury Secretary Geithner) trying to scare the American people into raising the debt ceiling by threatening that if they don’t do it, social security checks would not be mailed out. Well, why is that I wonder? If the government was merely holding the money you contributed, why would it need to borrow more money just to repay you?

Not only has government borrowing created a situation where debt levels are dangerously high, but the actuarial assumptions that undergird the social security system are completely unrealistic. But not unsurprising. When the baby boom generation was in the full peak of its earning power, from the 1970s through 1990s, the Social Security trust funds were flush with cash. The politicians in Washington just could not resist using them as a piggy bank to shore up short term budget gaps. So, instead of cutting spending, which would have been the prudent thing to do, the politicians merely raided the Social Security and Medicare trust funds. Now, when the baby boom generation is facing retirement, the consequences of borrowing have drastically changed. Our Government finds itself in the position of having to borrow money merely to fund current expenditures. When an individual or business does this, it’s usually called a death spiral. You use credit cards and other instruments to buy things that you are going to immediately consume – not actual investments such as a house or a car to get you to work.

The Social Security system was invented following the Great Depression, and was supposed to ensure that people were able to save at least a modicum of their income for retirement. It was supposed to be the ‘safe’ money, shielded from the stock market and greedy speculators. But the fact of the matter is that the Government has proven to be a poor steward of the nation’s retirement assets.

Let me pose a simple scenario. What if you gave me $10.00 to hold for you until your retirement? I kept it in a locked box, but everyday that money called my name. So I open the box and spend your money, leaving an IOU in the place of your ten bucks. Now, when it has come time for you to retire, I don’t have it. In fact, I have to go out and borrow it from someone else – at a time when borrowing is exceptionally dangerous. Isn’t that what they call robbing Peter to pay Paul? Would you ever again trust me to hold your retirement money for you? I think not.

This is part one of a 12 part series exploring the virtues outlined in my new book entitled Reawakening Virtues: Restoring What Makes America Great.