Is Social Security Bankrupt?

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Social Security is the social welfare program provided by the United States federal government. The program is designed to be a safety net for retirees and disabled individuals around the country. Individuals pay into the program throughout their working lives and then receive benefits once they retire. That sounds pretty simple and straight forward, right?

In theory, the Social Security program is supposed to pay for itself from the social security tax taken out of every paycheck in America. However, the Social Security tax receipts held at the Social Security Trust have been dwindling, quickly.

There are two reasons for the decline in assets in the trust. First, the federal government attempts to kick the can down the road (as always) by enacting short-term fixes to long-term problems. For instance it proposed combining several social programs into one fund which appears to be a last ditch attempt at funding one failing social program, using the funds from another social program.

The Bipartisan Budget Act of 2015 was projected to postpone the depletion of Social Security Disability Insurance (DI) Trust Fund by six years, to 2022 from 2016, largely by temporarily reallocating a portion of the payroll tax rate from the Old Age and Survivors Insurance (OASI) Trust Fund to the DI Trust Fund.

This short-changes America’s retirees that depend upon the benefits that they would have been receiving.

There is another reason why the trust is dwindling…

Social Security Was Designed To Fail

Social Security was enacted into law in 1936 and went into practice the following year in 1937. The average life expectancy in 1937 was 59 years of age while the retirement age was 65. Therefore, on average most people did not live until the retirement age when the social security benefits would have been paid out. Therefore, the program had 16 people paying for every one person receiving benefits.

Over the past 80 years advances in medicine and improved safety practices have led to an increased number of people living beyond that the average of 59 years. In other words, the program was designed to collect money from the population with little hope of paying it back. Now, the average life expectancy of individuals is 78. This means that on average social security recipients are receiving benefits for 13 years longer than the program initially intended for.

Not only that, but the United States has an aging demographic where some 75 million baby boomers, otherwise known as those being born between 1946 and 1964, are beginning to reach retirement age, making them eligible to receive social security benefits. With a population of roughly 325 million in the United States, that equates to 23% of the population retiring and claiming benefits which they paid for their entire working lives.

Is Social Security Bankrupt?

No, not yet at least. Rather than relegate unnecessary accusations or scare tactics, let’s listen to what the Social Security Administration itself is telling us:

Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing.

Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of both programs.

Both Social Security and Medicare will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment.

…leaving asset reserves of more than $2.8 trillion at the end of 2015 in its two trust funds.

The Trustees project that the combined trust funds [Old Age and Survivors Insurance and Social Security Disability Insurance] will be depleted in 2034…

So now that we know the facts, as stipulated by the organization that itself manages the fund and the program, lets extrapolate in plain English what this means for you.

At present rates, if nothing is changed, social security will not be able to fully meet its obligations by the year 2034. So for instance, instead of receiving 100% of  your benefits on a monthly basis, you would receive a percentage smaller than that, such as 33% less, so just 77 cents of every dollar you were promised.

The policies available to rectify these financial shortfalls are really straight forward. Either the retirement age increases, the social security tax increases, the economy experiences substantial growth (not 3-4% GDP), and/or spending and debt decreases. Those are the policy options to choose from, none of which require for you to be a mathematician to figure out. Inputs into the Social Security Trust Fund have to exceed outputs of the fund. Otherwise you could say that if the fund pays less than 100% of every dollar promised to you then that is a technical default on obligations.

Is The US Government Stealing From Social Security?

No, the government is not stealing from the Social Security Trust Fund. This is a common misconception.

Here is how the program works:

When the Social Security Trust Fund has excess funds (surpluses), it is by law required to pay the surplus to the government in exchange for “full faith and credit” backed government instruments (bonds).

Subsequently the government uses the surpluses in a number of manners (paying government debt, funding wars, etc). However, until the moment the government physically defaults on the US government bonds held by the Social Security Trust Fund (refusing to return cash in exchange for the bonds), or if the bond bull market of the past 40 years ceases and turns into a bear market (leaving the fixed interest rate yielding bonds to lose value) then no theft has occurred.

Bull markets are the authors of bear markets – as such, sooner or later the government could experience funding issues, that would force interest rates to move much higher as the currently historically low interest rates of debt and and historically high spending are unsustainable.

In such an environment there exist increased risks for the trust fund. You can however question the opportunity cost of having to invest into Social Security in the first place, and argue that you can allocate capital at a better return to you than simply investing in US government bonds through the Social Security Trust Fund, but that’s a topic for a different day.

Will You Receive Social Security Benefits?

First of all it is important to emphasize that no matter the estimates of yesterday, today or tomorrow, relying on social security to be your primary means of income during retirement is a strategy that predisposes you to significant situational risks, that frankly are not under your control.

Do you really want to be relying on what congress may or may not do or if the economy will or will not grow at a certain rate?

The younger you are the greater disadvantage you have in receiving social security benefits when you retire. This isn’t opinion, its just mathematics, extracted from the very words of the Social Security Administration’s annual statement.

You will receive a social security check, however the question becomes how much will you receive and what can you buy for that amount? If you are not familiar with the discussion of eroding purchasing power of your currency you can read this article on inflation or this article discussing the difference between currency and money or this article about the future of the US Dollar. If that list of articles to read wasn’t long enough, here is one about the US trade deficit and the future of the United States.

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