Social Security is Headed for Bankruptcy. Not.

Most people believe that the Social Security system is in deep trouble, that it is beset with problems that will lead to its bankruptcy.

They believe it, but it just ain't so.

The SS system is not in danger of going broke. It is not going to collapse, even though that's what many people have been led to believe—by those who have been opposed to it from the start.

For example, SS opponents have spread wide the notion, as though it mattered, that "the fund [i.e., the SS Trust Fund] has been used to pay for projects and programs not related to retirement."  Of course it has. 

In 1983 Ronald Reagan and Tip O'Neill set out to handle the future baby boomer retirement bulge, when FICA contributions from younger workers predictably would not cover all the payments needed for the boomers.  So they bumped up the FICA withholding tax, intending that the surplus thus generated be saved to pay for the boomer retirement bulge. 

As set up back then by Reagan, the SS Trust Fund surplus is used to purchase US Treasury bonds, in much the way that U.S. investors or the Chinese buy our Treasury bonds.

In all cases, the cash received is used for whatever the government spends money on--mostly the DOD these days--and the bonds add to the national debt. Both the bonds held by investors like the Chinese and those held by the trustees of the SS Trust Fund are backed by "the full faith and credit of the US Government".  If the bonds held by SS are "worthless IOUs" as Bush would have us believe—he even went all the way to Fort Knox to show on TV that they were just "worthless pieces of paper"—then so are the bonds sold to the Chinese and the T-Bills sold to US investors.  If all that paper is worthless, then we are in deep trouble indeed. But it just isn't so: none of our U.S. bonds are worthless.

The Trust Fund balance has been building since 1983, and it will keep increasing till about 2012, when the wave of boomer retirements will cause SS payments to surpass FICA collections.  At that point, the SS trustees will begin to redeem the bonds to make good the payments owed, and the Trust Fund balance will start to decline.

The big question is: will the Trust Fund bond balance be sufficient to cover the excess of payments over collections during the boomers' retirement?  Specifically, when the Trust Fund balance drops to zero in 40 or so years, will the system be in balance, with enough income to pay the then-current retiree benefits? 

The answer depends on what you forecast as the state of the economy 40 years out.  The usual conservative estimate for growth results in a shortfall of receipts, so that only about 75% of projected benefits could be paid at that time. This is the Social Security "crisis" that everyone bloviates about. It could easily be handled by increasing FICA beyond the current upper limit of taxed wages, or by a modest increase in the SS tax, or by increasing the retirement age, or some combination of these.

But there is no need to rush to a solution to this "problem" for another ten years or so, and it may never be necessary to do anything. Because, if you use a less pessimistic but entirely plausible forecast of economic growth for the next 50 years and project it not as dropping but staying the same as it has been for the past 50 years, no change is needed to avoid SS deficits 40-50 years out.

But even in the case of a pessimistic growth estimate, and assuming nothing is done, reducing payments to 75% of what otherwise would be paid isn't as bad as it sounds.  That's because SS payments are based on average wages, not the cost of living, so they actually increase at a rate slightly faster than the cost of living.  Adjusted for inflation, 75% of payments due in 40 years might actually be greater than what retirees receive now.

In short, there is no "Social Security Crisis" confronting us now or for many years to come. And the belief widely held by young people that "Social Security just won't be there for me when I retire" is just not so.

This is not to say that there is not a fiscal crisis caused by cutting taxes and spending money as though we hadn't. The national debt, which includes those SS Trust Fund bonds, is increasing all too dangerously.  Somehow, the government and the press don't treat SS Trust Fund bond borrowing as such when computing the annual deficit, hence the misnamed Clinton “surpluses”.  (When you borrow from Peter to pay Paul, you don’t create a “surplus”.)

The original idea was that the SS Trust Fund debt would displace other non-SS debt owed the government, so as debt to the Trust Fund went up, other debt would go down, and that did happen during the Clinton years, with their “surpluses”. Clinton at least did slow the growth of total debt to near zero, which led to the fear, at the beginning of the Bush administration, that cumulative Trust Fund debt would eventually constitute the total US debt, allowing the “surpluses” to pay non-SS debt down to zero, so the Treasury would no longer be selling T-Bills. That of course never happened.  The Bush tax cuts plus war costs ballooned our total debt, so we owe huge amounts to both the boomers who have advanced us the money for their retirement and to the Chinese.   

Comments

[Tom Hagan]

Ken, you may have saving/borrowing reversed. The SS Trust Fund is not borrowing, it is saving, by collecting a surplus from 1983 through about 2012 that is saved by purchasing US Treasury bonds, which represent borrowing by the US Treasury, as do all Treasury bonds. In effect, the baby boomers are buying U.S. Treasuries to save for their retirement.

That money is indeed invested by the SS Trust Fund in U.S. Treasury bonds, at a decent interest rate.

The problem is not with SS, it is with the Bush administration, who simply added this money to money it was already borrowing rather than cutting that other borrowing, as was done under Clinton, leading to the so-called Clinton "surpluses".

They were not really surpluses at all, but displacement of normal borrowing with receipts from the SS Trust Fund, for which bonds were issued. Total U.S. debt did not go down, as it would if there had been real surpluses. But Clinton at least flattened the total U.S. debt, while Bush has allowed it to climb precipitously. And the surplus receipts from FICA are declining, will go to zero around 2012, at which point the Trust Fund will begin redeeming its bonds.

There is no evidence that the administration has a plan to deal with this drying up of SS surpluses. Total fiscal irresponsibility on the part of Bush and Co.

[Kenneth Moyes]

Social security Trust Fund bonds are a liability. So we are financing our retirement system with borrowing. Borrowing has an expense. How many of us wish to fund our retirement with borrowed money to be paid back by our children? To say that the fund is not going to go broke, because we will just borrow the funds, hints of a weak economic policy. What is wrong with placing the "fund" back on a solid footing, having it earn at a public investment market rate, and forbidding the Congress from using the FICA collected funds as general tax revenue - as it is this is a regressive tax. Letting the Congress continue to spend it on other than Social Security is like giving your 12 year old your AMEX Gold card and telling them to use it wisely.

http://brokengovernment.wordpress.com/2008/02/01/social-security/