Strengthening Constitutional Self-Government

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A New Definition of "Solvency"

In scanning the AP piece that Peter called our attention to below, I noticed an interesting couple of paragraphs:

Declaring Social Security will go broke if nothing is done, Bush said that by 2042, "the entire system would be exhausted and bankrupt."

In fact, the nonpartisan Congressional Budget Office (news - web sites) forecasts Social Security as it is would be able to pay 73 percent of benefits in 2042 and stay solvent for 10 years beyond that.

So in other words, the system will remain "solvent," assuming that benefits are reduced by over one-fourth? Is that supposed to make those of us who will be thinking about retirement at around that time feel better about the health of Social Security?

Discussions - 2 Comments

John,

I don’t know much about the issue, but is the only way in which they’d even be able to sustain one-quarter benefits would be through massive subsidization from the General Revenues? It does not mean much to say it will be "solvent" but only because money from the Treasury will be diverted away from other things and given to Social Security. Solvency should depend upon the amount taken in through the SS tax keeping up with and exceeding the amount paid out in benefits.

I remember seeing a graph once that showed Medicare taking up over 50% of the Treasury in 60 or 70 years. Sure, Medicare might be "solvent," but that situation is hardly desirable. I just wonder if the same holds true for SS.

Anyone know anything more about this?

There are two definitions of insolvency, and a large part of the confusion in this debate is because the various parties are using them interchangably, plus introducing a third concept which is not insolvency.

"Technical Insolvency" is when cash outflow exceeds cash inflow. Negative cash flow is what’s projected for the system in 2018.

"Absolute Insolvency" is when liabilities exceed assets. The system has been insolvent (had negative net worth) by this definition for decades - the present value of vested, guaranteed liabilities currently exceeds assets by some $6 trillion (the Ponzi Scheme scenerio).

The third, undefined, circumstance is when the system still has liabilities and $0 assets - this is the 2042 condition. There is no appropriate insolvency definition for this condition, since only a government has ever been allowed to reach it.

If we’re going to discuss this issue logically, the politicians need to bring some rationality to the terminology.

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