Yet another strain on social security
Blame baby boomers who want to retire early. While it could be good in the long run, in the short term it hurts the system and the overall economy
(breakingviews.com) -- Retiring baby boomers are the latest poopers at the U.S. fiscal party. The social security system may run a cash deficit in 2010 and 2011. That wasn't supposed to happen until seven years later.
Early retirement by baby-boomers would reduce the long-term burden on the social security trust fund. But the short term cash outflows would worsen budget shortfalls and make funding them more difficult.
The recession has sharply reduced the number of workers making payments into the trust fund, while jobless early-wave baby-boomers, now passing the minimum benefits age of 62 in increasing numbers, may have had little choice but to begin drawing social security early once their unemployment benefits ran out. So it's not surprising that the trust fund has run into difficulties.
It is also not surprising that baby-boomers would choose to take retirement early. They reached their peak savings age at a time of unprecedented run-down of the U.S. savings rate. During the stock market bubble of the 1990s, baby-boomers also made early retirement fashionable. For those unemployed or in unfulfilling jobs at 62, waiting until the normal retirement age of 66 to draw benefits may be unpalatable.
Nevertheless, if more baby-boomers choose early retirement than expected, the social security trust fund will in fact benefit over the longer term. The average actuarial value of social security is 14.6% higher if drawn from the normal retirement age of 66 rather than from 62, and would be higher still if drawn from the maximum age of 70.
But if a flood of baby-boomer retirements would be good for the trust fund, it would be bad for the U.S. budget. The social security surplus of $180 billion in 2008 counted against the budget deficit and reduced the market borrowing requirement correspondingly.
A 2010 social security cash flow deficit of $10 billion admittedly becomes a $70 billion surplus when trust fund interest is added in. But even with other things being equal, that means the U.S. government needs to borrow $110 billion more than last year.
If social security shortfalls do set in, that would make fiscal discipline even harder to achieve -- and more necessary than ever.
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