Millions of people rely on Social Security for either full support or supplemental retirement income. In fact, over 22 million people in the U.S. are lifted out of poverty thanks to that government program.
But over the past few years, there have been thousands of headlines explaining that Social Security will begin paying out more than it brings in and that the U.S. national debt is rising. Are the two things connected? Kind of.
They are tied together, but the connection isn't as clear as you might think. In this video from our YouTube channel, we break down how the national debt affects Social Security, and why you don't need to worry about your monthly payments any time soon.
Narrator: Hi, and welcome to The Bottom Line. In this video we're going to take a look at how the rising national debt isn't as big of a problem for Social Security as you might think.
For the past eight decades, Social Security has been providing a financial foundation for our nation's retired workforce.
Today, over 22 million people are lifted out of poverty as a result of their monthly payout, and more than 15 million of these folks are retired workers.
If Social Security didn't exist, elderly poverty rates would soar, and the long-term disabled would also be in pretty big financial trouble.
But Social Security is facing some very real challenges.
The program will begin spending more money than it collects in 2020. And the nearly $2.9 trillion currently in asset reserves will be completely exhausted by the year 2035.
Unless additional revenue is generated and expenditure cuts made, an across-the-board benefit reduction of up to 23% could await retired workers.
But this isn't the only cash crunch pundits have suggested could threaten Social Security.
There's also the belief that our nation's growing debt level could compromise the ability of the federal government to make good on its outstanding debt.
So what does the federal debt and Social Security have in common?
Well, Social Security uses its asset reserves to buy bonds and other investments. And then the federal government borrows some of this cash to fund general revenue line items.
Social Security then receives interest payments from the federal government until the bonds mature.
The concern is that if the national debt rises too high, then the federal government won't be able to repay the interest it owes to the Social Security program.
But for that scenario to play out, national debt levels and interest rates would probably have to climb significantly from where they are now.
In other words, this is something that would happen generations down the road.
Additionally, Social Security's asset reserves are expected to be completely exhausted by 2035, which is well before the federal government's debt levels would be in the danger zone.
Without any excess cash, no special-issue bonds would be purchased by the federal government and, therefore, no interest payments would need to be made.
The other concern some people have is that rising national debt levels could negatively affect the federal government's General Fund.
But Social Security is not part of the General Fund.
Instead, it has three separate sources of funding, two of which are recurring sources of revenue for the program.
Most of Social Security's revenue comes from a payroll tax on earned income, as well as the taxation of benefits.
The Bottom Line is that as long as Americans continue to work and earn income, these two sources of recurring revenue ensure that there will always be money flowing into Social Security that's completely independent of our country's national debt.