While we're on the topic of fresh agendas for reform...

Few people now deny the looming solvency issues of social security; but most discuss them as if they are in the distant future. Indeed, this implicit assumption likely underlies the lazy pace of progress towards fixing the problem.

The companion chart, summarizing these solvency issues, would seem to confirm this sentiment: the trust fund doesn't "run out of money" until about 2030. We're good till then, right?

Not quite.

The actual well-being of the country with respect to social security will in fact start to perceptibly worsen not in 2030, but in 2012 -- veritably right around the corner. As you can see on the chart, this is the date when revenues no longer cover social security expenditures, and we need to actually start "drawing down" the trust fund.

This sounds OK if you don't know what this "trust fund" really is -- and it is nothing like a savings or investment account your or I might have. The social security trust fund is simply filled with US Treasury securities! In other words, the contents of the trust fund are little more than superficial "IOUs" from the government to itself. Put another way, this trust fund consists of nothing more than claims of "this much wealth should have been allocated to cover someone's retirement expenses (but it wasn't)."

It might help to look at the mechanics of this surprisingly-blatant ledgerdemain; whereby the design of our state retirement program is more reminiscent of the suitcase full of scrap-paper IOUs from the movie Dumb And Dumber than something becoming of the world's most wealthy and powerful nation.

Firstly, since the government is structurally in deficit, it can't "save" money at all, for anything -- no matter how tortured the book-keeping. That means when the SSA takes in revenue and uses it to buy some US Treasury securities, the government is immediately spending this money (the purchase of official as opposed to private securities is essentially an admission that the government is broke and just needs more revenues). It then has to raise more revenue in the future to pay interest on those securities (about $200 billion/yr now goes just to pay interest on entitlement obligations, in fact). The situation is worse if the securities are "called in" (redeemed early by the buyer) -- then the government has to somehow return all the remaining principle (which it already spent) immediately, which translates to yet another revenue-raising pressure. Far fetched? Not at all: this additional factor looks set to kick in around 2018.

The upshot is that if there is a solvency problem with social security, it starts in 2012: this is the date when taxes will have to be raised, inflation increased, spending cut, or social security benefits cut -- just to stay afloat. Then it gets worse in 2018 when the "trust fund" starts shrinking (i.e. is net drawn-down).

In fact it is probably more honest and illuminating to simply imagine that there is no trust fund when analyzing social security's solvency -- because there is by definition no "value" in the trust fund we have.

There is of course a weaselly way out of this dilemma for the government: they can just accelerate inflation while under-reporting it, so that entitlement disbursements gradually diverge downwards from the real expenses of beneficiaries. Currently they've already been doing this to the tune of at least 42%. I'm sure they'll be banking on more of this effect to help make ends meet. The problem is that the scam will become more and more obvious the larger it is, and at some point it will create a humanitarian disaster in the quantity of people it leaves destitute.

So, we need to do something, now. Otherwise things will start to really get ugly in 2012 -- or possibly sooner if other economic factors deteriorate (and I'd wager they will).