One of the virtues I discuss at length in my new book, Reawakening Virtues: Restoring What Makes America Great is the virtue of saving. It’s interesting these days to see the ongoing debate over the federal budget deficit and debt. On the one hand, some are calling for cuts in what many consider to be essential social programs: Social Security and Medicare.
On the other hand, some believe that the government should either go deeper in debt to cover the rising costs of these programs, increase taxes on the wealthy and business, or make cuts to other parts of the budget such as defense. All of these approaches have their supporters and detractors but the fact remains that the underfunding of social security starts and ends with the problem of saving.
Let’s be clear. Social Security is not an entitlement program. That is, unlike welfare and food stamps, the people who receive Social Security have contributed to the program over the course of their working career through payroll taxes specifically designated for the purpose of saving for retirement. They are therefore owed at least the amount of money they contributed.
However, problems started to arise when the federal government, under both parties, began borrowing from the so-called Social Security trust funds to spend on other items in the budget.
The trust funds are not like your traditional private trust funds that are fully funded. In fact, these trust funds are empty. The government has borrowed every single dime that comes into the trust funds to spend on current expenditures. We have a problem now because our total national debt is approaching (and may have exceeded) our yearly gross domestic product. Most countries that have this level of debt do not enjoy the high credit rating and low borrowing costs that America currently does.
If we continue to use short term borrowing to fund long term investments we will soon run into trouble. Just look at what happened with the investment banks Lehman Brothers and Bear Stearns. They borrowed in the overnight markets to fund their investments in highly illiquid long term securities. When some of those securities plummeted in value, so did the value of their collateral. Thus, they were faced with a situation in which they needed to borrow money just to stay afloat – but they did not have the asset values to back them up. Each firm collapsed within a week of this situation becoming public.