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Why the Social Security Trustees Report Is Meaningless

Every year, the trustees of the Social Security Trust Fund give their report assessing the health of Social Security. Every year, the report draws a line in the sand beyond which retirees and other Social Security recipients will no longer receive full benefits, raising a big debate about what steps the government should take in order to shore up the program on which millions of retirees rely for the bulk of their income in their old age.

Yet behind all the assumptions and actuarial projections contained within the report, one glaring omission makes its conclusions essentially meaningless: the failure to consider political reality. Given the inability of decision-makers in the government to reach compromise until the last possible minute, the only thing the Social Security Trustees report really tells us is that 2033 will be the year in which Congress and whoever the president happens to be will have to begin negotiations to avoid what might eventually be dubbed the "Social Security cliff."

Social Security Administration Building, Washington, D.C. Source: Wikimedia Commons.

What the report says
This year's report makes its usual set of ominous projections. According to its analysis, the deficit between Social Security payroll tax revenue and benefits paid will keep rising, and by 2020, the interest on the Treasury bonds held in the Trust Fund will no longer be sufficient to cover that deficit. That in turn will force the Trust Fund to start redeeming bonds, and by 2033, the Trustees project that the Social Security Trust Fund will be empty.

At that point, the program would have tough choices. With no increase in taxes, the program's revenue would be enough to pay about 75% of benefits. Alternatively, to sustain benefit levels, withholding taxes would have to rise from their current level of 12.4% -- split equally between employer and employee -- to about 16.5%. The other option would be for the government to agree to changes in benefits that would reduce the program's overall cost, such as increasing the retirement age, making changes to inflation adjustments on benefits, or adding restrictions like means-testing to the benefit calculation.

A dose of reality
When you consider the track record of dealing with major changes in the laws that have the most financial impact on Americans, the government doesn't fare all that well. Back in 2010, when tax cuts enacted in the early 2000s were set to expire, Congress and the president agreed to extend the provisions for another two years without really addressing the substantive issues of keeping the cuts versus letting them expire.

Then, the debt-ceiling debate arose in 2011. Lawmakers took the nation to the brink of default before finally coming to a compromise, and that inspired ratings agency Standard & Poor's to downgrade the former AAA credit rating of U.S. Treasury obligations. S&P specifically referred to the government's inability to put together enough of a deficit-reduction package to satisfy the ratings agency.

Worst of all, at the end of last year, the fiscal-cliff debate lingered until the end of December and beyond, leaving taxpayers completely unable to plan properly for their 2012 tax returns in light of the government's failure to clarify the provisions of the alternative minimum tax. With AMT patches having been enacted every year, it was reasonable for taxpayers to assume new measures would be put in place, but Congress ended up providing AMT relief retroactively going back more than a year in its New Year's compromise.

Letting automatic cuts happen
Until sequestration hit, though, the government usually managed to get things handled in the long run without major incident. But the government's allowing automatic spending cuts to occur raises the possibility that political gridlock could indeed lead to retirees going over the Social Security cliff in 2033.

Moreover, when it comes to retirement issues, the government has given private employers huge latitude in maintaining pension-plan deficits. Boeing (NYSE: BA  ) , General Electric (NYSE: GE  ) , and Ford (NYSE: F  ) have had some of the worst pension shortfalls among U.S. companies, but the extent of the problem is as broad as it is deep, with a huge number of employers dealing with pension liability issues. Yet rules governing pension plans have allowed companies plenty of time to address any problems.

With that track record, lawmakers are likely to give themselves the same latitude in 2033 or whenever the Social Security cliff hits. All the government would have to do is to approve deficit spending to cover the benefits shortfall.

Don't panic
As an intellectual exercise, the Social Security Trustees Report serves the valuable purpose of focusing public attention on the financial challenges that government programs face. But without realizing the reality of Social Security's status as a third-rail political issue, you shouldn't plan on its conclusions reflecting the reality of the situation when it finally comes decades down the road.

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Read/Post Comments (10) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2013, at 11:56 AM, lovemynation wrote:

    One can't help but wonder if the govt had kept their hands out of the "locked trust fund", we wouldn't be faced with the issues that are ahead of us. But instead, our leaders decided that they could put our money to better use, or as they deemed most beneficial for their own use. Of course, they've never had an issue when it comes to spending money that isn't theirs.

    And they didn't "borrow" it, they raided it and cleaned it out. They used it for propping up agencies, handing it out to people who never paid a dime into it, and spending it on their own projects and special interests. Besides, they said they were going to pay it back, but.......

    Now, you must jump through many hoops and detours before you can collect it. And what some do collect, barely pays the bills.The people who retire, become disabled while working or become too sick to work, must qualify by, and through, a bunch of red tape and bureaucrats. It is such a hassle, they hope you get sick and tired of it, so you'll just forget it. Or at least that is how it seems for many. It can take up to 5 yrs for some.

    Sen.Kent Conrad (D), stated into an "off" mic, that the govt OWED the Soc.Sec. fund over $3.5 Trillion that would NEVER be paid back. So that tells us just how worried they are about any of US collecting what we are owed. But, rest assured that many who never worked a day or paid into it, as well as our leaders, have theirs. And to the workers today, they are now responsible to keep those payments coming in, to pay those collecting now. And since it now goes into the general fund, with the closing of the "locked trust fund", our trusting leaders have made sure that they have access to every cent left over, after payments are made.

    We were promised that it was a locked trust fund that our govt could NEVER TOUCH, because it was paid by us, to be used by those who PAID INTO IT, ONLY, and would help take care of us, after we could no longer work. I guess this promise is like all the other ones we get during the campaigns. They only mean it, when looking for a vote. Or like the promise we were given by Reagan and Congress, after they granted amnesty to the millions here. Never again, we were told. It shows us that when it comes to the citizens, and promises made, they are only good as long as it takes to say it. After that, they are forgotten, and invalid.

  • Report this Comment On June 01, 2013, at 1:05 PM, heropass wrote:

    You say "With that track record, lawmakers are likely to give themselves the same latitude in 2033 or whenever the Social Security cliff hits. All the government would have to do is to approve deficit spending to cover the benefits shortfall."

    By law, however, Social Security can only spend money from its designated payroll tax or interest on the bonds in its trust fund. Therefore, it cannot contribute to budget deficits or the national debt. And what you say would require passing an unpopular law, so it's not likely.

    The easiest political solution that has the most popular support is to raise the payroll tax a bit (~2%) on current payers, and to raise the upper limit on what income pays payroll tax a little bit, too.

  • Report this Comment On June 01, 2013, at 1:22 PM, amosnme wrote:

    If the government would pay back what they "borrowed" from Social Security, we would have enough money to last through generations--especially if they paid it back with the rate of interest they charge. If it's not paid back, it wasn;t borrowed....it was stolen.

  • Report this Comment On June 01, 2013, at 8:49 PM, TMFGalagan wrote:

    @heropass - I believe that a law allowing further funding for Social Security would be far more popular than allowing benefits to get cut. I also don't see any political support for any near-term fix to the problem, despite agreeing with you that dealing with it sooner rather than later would be easier in terms of impact on the program and on taxpayers.

    best,

    dan (TMF Galagan)

  • Report this Comment On June 03, 2013, at 5:00 PM, chocteach54 wrote:

    First of all if we want to ensure social security's future there are really only 2 things that need happen:

    1. End the cap on social security taxes. I pay the same taxes as people making substantially more which makes no sense at all. End the cap and ensure funding for the fund well into the future

    2. End congressional raiding of the trust fund and move liabilities of other programs that have been "bolted on" to social security elsewhere in the federal budget. Programs like SSI and others that have been added to the Social Security portfolio were never meant to be in the retirement supplement program.

    Finally, lets really consider the concept that if you are making a million a year do you really need social security? Denying reality will not change it!

    Isaac

  • Report this Comment On June 03, 2013, at 7:05 PM, snowmon wrote:

    The 2033 date is bogus. It is just an artificial construct to form the pretense of an "insurance" program. That is when the so called "trust fund" runs out. However, the so called trust fund has no real assets. The SSA hands excess collections to the Fed Gov to spend, in exchange for an IOU (the "trust fund"). The entire program is simply a debt engine. This "intergenerational debt" has built up over time, but the age wave will reverse the tide. The moment SSA needs to spend more than it takes in, the Fed Gov will have to kick in the difference. The Fed Gov has no capacity to do this without dramatically increasing taxation outside of FICA. The actual SS entitlement bomb hits way before 2033.

  • Report this Comment On June 03, 2013, at 7:53 PM, xetn wrote:

    The simple fact is there is no money in the Social Security trust fund and never has been (at least in recent history). There are just a bunch of treasury notes. So, when checks are issued each month, the treasury has to borrow the funds to make the payments.

    Somehow, the government has reached the untenable conclusion that liquidity equals solvency (as Rick Rule as stated numerous times).

  • Report this Comment On June 04, 2013, at 3:00 AM, pmdoc1 wrote:

    The report is meaningless because there is no money in the trust fund, only debt that will have to be paid through general revenues by a federal government that is already bankrupt, and rapidly moving towards insolvency.

    Age demographics have already doomed this Ponzi scheme. Younger generations will get an increasingly poor return on their forced investment. Older generations will see the purchasing power of their checks eroded by real world inflation that is significantly higher than their annual COLA.

    Although high wage earners already get the lowest return on their contributions expressed as a percentage, populist votes will force high wage earners to pay even more into the system by raising the cap faster than the government stated CPI.

    Instead of trying to "Save" the immoral Social Security Ponzi Scheme, we should let it slowly die off and allow people to save and invest for their own retirements.

  • Report this Comment On June 04, 2013, at 11:57 AM, mdk0611 wrote:

    chocteach54 - The people who earn substantially more than you do NOT get a larger Social Security benefit than you. Social Security is not a welfare program financed from general revenues. It is, effectively, a defined benefit plan self-funded by the taxpayer and his/her employer.

    In addition, the current benefit calculation are slightly biased towards low income recipients. To go beyond that and say someone who contributed to the system for 45 years is entitled to nothing is essentially government by confiscation.

  • Report this Comment On June 04, 2013, at 6:24 PM, neamakri wrote:

    Before year 2010 there were 4 workers per retiree. Sometime after 2010, as baby boomers retire, there will only be 3 workers per retiree. In order to keep the same pay-as-you-go Social Security system the 3 workers must pay 33% more taxes to cover the missing worker, or else the retirees must accept 25% less money due to the missing worker. All current "fixes" to Social Security involve paying retirees less money.

    The country of Chili had the same retirement system we had. Chili privatized their system many years ago with great success. All we need to do is copy Chili's plan.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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