Early retirements strain Social Security: Is U.S going broke?

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In the latest sign the Social Security ticking time bomb is almost ready to explode, an unexpected spike in the number of early retirement claims will cause the entitlement program to run a deficit as early as 2010, nearly a decade ahead of earlier projections.

The system has suffered not only a 23% increase in early retirement applications, but the severe recession has resulted in the loss of 6.9 million jobs. In this negative feedback loop, older employees lose their jobs and thus stop paying into the system while applying for early retirement benefits when they are unable to secure a new job.

The federal government maintains that there is no cause for alarm even though the Congressional Budget Office says that the system will begin running permanent deficits by 2016, and will be totally depleted by 2036. The government reminds us that the Social Security Trust Fund has a surplus of 2.5 trillion, even though this “surplus” consists of IOU’s from the federal government. The actual surplus has already been confiscated and spent on a wide variety of social engineering projects, countless layers of inefficient and valueless bureaucracies, entitlements and pork barrel projects.

The severity of the Social Security crisis and other growing deficits begs a larger question: Is the US government going broke?

In a 2006 Federal Reserve Bank of St. Louis Review article, Boston University Professor of Economics Lawrence Kotlikoff examined the country’s probable “fiscal gap”. This is explained as the value difference between all future government expenditures, including servicing official debt, subtracted from all probable future receipts.

The results of these calculations indicate a shortfall of an unimaginable 66 trillion dollars. We are beginning to see the fiscal dam spring leaks with a 2010 projected budget deficit of 1.17 trillion. There are serious consequences coming as a result of this systemic irresponsibility.

Kotlikoff goes on to explain that the insolvency of the federal government will become more apparent as revenue shortfalls become more pronounced. It will leave the government with extremely unpopular choices. One likely scenario would result in an immediate and permanent doubling of personal and corporate income taxes. In another, there would be a permanent two-thirds cut in Social Security and Medicare benefits.

Chillingly, Kotlikoff’s 2006 paper predicts and outlines the most likely outcome when budget shortfalls become too excessive to sustain as is the case in fiscal 2009-10.

“Given the reluctance of our politicians to raise taxes, cut benefits, or even limit the growth in benefits, the most likely scenario is that the government will start printing money to pay its bills. This could arise in the context of the Federal Reserve “being forced” to buy Treasury bills and bonds to reduce interest rates. Specifically, once the financial markets begin to understand the depth and extent of the country’s financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars.

“This concern will lead them to start dumping their holdings of U.S. Treasuries. In so doing, they’ll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creation—exactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.”

The Federal Reserve began buying Treasuries in March off 2009.

The United States has time to get its fiscal house in order. But progressive measures like the flat tax, entitlement reform, curtailing benefits to illegal aliens and meaningful health care reform are probably too politically unpopular for politicians to address until another even worse crisis is upon us.

Therefore, make sure your own fiscal house in order. We are all being warned from a variety of quarters.