The Democrats are all over John McCain for referring to the current status of social security (not, as they falsely imply, the program itself) as a disgrace. For a local manifestation, check out Michael Leon at Jay Bullock's bog, supported by Jay in the comments. McCain was referring to the fact that the program is about to go upside down with expenditures exceeding revenues. It is in that context that McCain said that younger workers paying for older workers retirement is a disgrace.
What a fool, they say. He doesn't understand the program. It has always been "pay as you go."
No, it hasn't. Not since 1983. In keeping with Mark Steyn's observation that demography is history that has already happened, we have known for a long time - over thirty years - that "pay as you go" was unsustainable. The reason, of course, was a combination of longer life spans and the pig in the python called the Baby Boom. We knew that a time was coming when there would be dramatically fewer workers than retirees because there are a lot more people who are my age than Jay's.
So we did something about it. In 1983, we effectively abandoned "pay as you go" raising social security taxes to a level that were designed to exceed what was required to pay current benefits with the excess going into a social security trust fund which could then be used to pay benefits during the time that the Boomer pig was passing through the snake. This was the "lock box" that Al Gore kept referring to before he realized that he had to save the world.
The purported existence of this trust fund is the reason that Jay and others claim that social security is solvent and can continue to pay most of the promised benefits.
And that would be true - if the trust fund really existed. But it doesn't. The lockbox is, for all practical purposes, empty.
Oh, it's there as a matter of bookkeeping but it contains no cash or marketable securities that the government can use to pay its obligations. What has happened is the government has spent the excess social security taxes - the ones that were supposed to be set aside for the rainy day that we have long known is coming - on other things.
The trust fund consists of nothing but treasury bonds. That might be a great asset if you are someone other than the government, but not so good if the entity holding the bonds (the US) is also the one liable on the bonds (the US.) It's as if I saved for my kids education or my retirement by spending what I was supposed to save but dutifully writing myself IOUs. Here's how OMB puts it:
These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense.... They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)
So - in about 2018 - when benefits begin to exceed revenues - we are going to either have to raise taxes or borrow more money or, but this is probably fantastical, cut spending. This is because, although the trust fund can redeem those bonds and the government will presumably honor them, the government that redeems them is the same government that is paying the social security benefits. In order to redeem the bonds, it has to find the money to do so.
As time goes on, the shortfalls - particularly when combined with projected shortfalls in medicare - figure to be huge. We have known about this for years and we have done nothing about it. That is a disgrace.