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By Root 791 0

defense spending can and should come down—we spend about as much as all other nations combined—we have to be careful how, when, and how much we cut it. We have to maintain enough personnel to deal with future conflicts and emergencies, without the terrible toll multiple deployments to combat zones with limited breaks in between took on military families when deployments in Iraq and Afghanistan were both at their high-water mark. We have a lot of old military equipment that has to be repaired or replaced after years of heavy use. And we don’t want to cut the advanced research budget that gave us the drones, first for intelligence during my administration and then, during Presidents Bush’s and Obama’s terms, for surgical strikes. And we can’t forget that a lot of military research eventually winds up producing applications for our civilian economy, creating new businesses and good jobs.

One of the most interesting examples of the interaction between military investments and growth in the economy can be found in Orlando, Florida. For decades the military, defense contractors, and NASA have had major operations in or near Orlando. It’s also the home of Disney’s and Universal’s theme parks and the branch of Electronic Arts that develops sports video games. The University of Central Florida, with more than fifty thousand students, designs programs and projects to serve the needs of both the defense and the entertainment operations and to support the creation and success of the new companies and good jobs that can thrive in this environment. More than one hundred companies, from the very small to the very large, have located in Orlando to do sophisticated simulation work. Simulation helps the military to train personnel, Disney and Universal to provide exciting realistic attractions, and Electronic Arts to design engrossing video games. The military invests $5 billion a year in Orlando, money it would spend on training, information technology, and targeting systems anyway. This way, it gets better results faster and grows the economy.4

NOW LET’S LOOK AT SOCIAL SECURITY. Is it broke? Technically, no, but there is a cash-flow problem. It’s important to understand this so we can make the right decisions about what to do.

About 60 percent of Social Security’s fifty-four million beneficiaries are eligible for the benefits based on their age; the rest are disabled or dependents and survivors of retired workers. Almost all workers pay 6.2 percent of wages into the system, as do their employers. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced 2011 Social Security tax rates for employees to 4.2 percent. This tax rate is currently set to return to 6.2 beginning in 2012. Benefits are progressive, in that lower-income workers receive a higher percentage of their working income in benefits than higher-income workers do. Taxes are collected on earnings up to $106,800. Those who earn more pay no Social Security taxes on the amount above that.

Social Security is a pay-as-you-go system. Until 2010, revenues collected were greater than the cost of benefits. So Social Security lent the surplus revenue to the federal government in return for Treasury Department securities worth the same amount, plus interest. The value of the Treasury bonds is more than $2.5 trillion. The interest earnings of the trust fund are greater than this year’s payout, but those earnings also are paid in more bonds, not cash.

Because it is not paid in cash, the Social Security fund is nowhere near broke, yet it has begun to run a cash-flow deficit, $45 billion in 2011. That means that this year beneficiaries’ checks will be funded in part from money borrowed from U.S. and overseas buyers of our bonds. The amount we borrow will continue to grow as the baby boomers move into retirement age, unless the rest of the government begins to operate with a surplus sufficient to cover Social Security’s outlays or slows the projected increase in the program’s cost.5

Social Security’s current cash shortfall and future problems are the