Each and every month, at least as of April, nearly 43 million retired workers receive a Social Security benefits check. Of these retirees, more than three out of five are reliant on that check to account for at least half of their income, with 34% leaning on Social Security for practically all of their income (90% to 100%). In other words, this is more than just a check we're talking about -- it's a financial lifeline that ensures elderly poverty rates stay low, and helps older Americans meet their financial obligations during retirement. 

Americans' lack of Social Security knowledge has led to plenty of misunderstandings

Yet, for as important as Social Security is to today's retirees, most folks don't really know much about America's most important social program. As evidence, a recently published survey from MassMutual of more than 1,000 seniors aged 50 and over found that 47% failed its true-or-false, five-question Social Security quiz. A fail was defined as scoring 60% or lower. Essentially, we don't know a lot about Social Security -- and what we don't know has allowed our imaginations to run wild. 

A Social Security card wedged between fanned cash bills.

Image source: Getty Images.

For example, the rumor has circulated for decades that Social Security was headed toward bankruptcy, and that it wouldn't provide a benefit to future generations of retirees. Thankfully, we've debunked this misconception on more than one occasion. Social Security's 12.4% payroll tax on earned income between $0.01 and $128,400, as of 2018, ensures that as long as people keep working, payroll tax revenue will be collected for disbursement to eligible beneficiaries. Sure, future benefit cuts may be in order, but the program itself is in no danger of running out of cash.

Another oft-cited falsity is that Congress knowingly and willing raided the Social Security Trust Fund and stole the money that was in there, with no intention of paying it back. Most folks who believe this theory suggest that Congress should pay back what it stole, with interest, and the cash shortfall facing the program would be resolved. Of course, absolutely none of this is true.

To disprove this misconception, it first helps to set the record straight on where Social Security's asset reserves are, right now.

A snapshot of Social Security's $2.9 trillion in asset reserves

Since the Reagan administration passed the last sweeping overhaul of Social Security back in 1983, the program has been cash flow positive. In effect, it's been generating more each and every year in revenue than it's paying out in benefits. This has allowed the program's asset reserves to grow from virtually nothing in 1983 to total a little bit more than $2.9 trillion as of April 2018.

A table showing the various bonds and certificates of indebtedness where Social Security's asset reserves are currently invested.

Image source: Social Security Administration.

But where is this cash today? Where it's not is lying around in a safe, or hiding under lawmakers' beds. Instead, extra cash for the Social Security Trust Fund is invested in special-issue bonds, and to a far lesser extent, certificates of indebtedness. By investing Social Security's excess cash into bonds, the federal government is able to generate interest income for the program. In 2016, $88.4 billion of the $957.5 billion collected by Social Security came from interest income on its asset reserves. 

As you can see, the average interest rate being earned on Social Security's asset reserves is 2.9%. You'll also notice that the maturity dates for these interest-bearing assets vary greatly. This is to ensure that the program remains somewhat nimble in its ability to purchase new special-issue bonds should interest rates rise. A seven-year low in the federal funds target rate between December 2008 and December 2015 is a big reason the average yield on Social Security's asset reserves has fallen pretty steadily over the past decade. 

What Americans need to understand is that it's extremely common for the federal government to fund itself by selling debt. At no point previously has the federal government failed to make an interest payment to the Social Security Trust, and at no point previously has the Trust not received full value when a special-issue bond matures. These are debt instruments that are fully backed by the federal government. Or to put this another way, Social Security's asset reserves haven't been raided, and the federal government is currently paying interest on its debt.

A worried senior woman in deep thought, with her arms crossed on a chair, and her head resting on her arms.

Image source: Getty Images.

Here's something to genuinely worry about

If the American public really wants to worry about Social Security's excess cash, they should direct that concern at the expected depletion of these trillions of dollars by 2034, according to the Social Security Board of Trustees.

Beginning in 2022, Social Security is expected to begin paying out more in benefits than it's generating in revenue for the first time in four decades. This switch from being cash-flow positive to cash-flow negative is the result of a confluence of factors, including the ongoing retirement of baby boomers, lengthening life expectancies, and growing income inequality. This cash outflow is expected to accelerate with each passing year, resulting in the complete exhaustion of the Trust Fund's asset reserves by 2034.

As noted earlier, the depletion of Social Security's asset reserves doesn't mean bankruptcy. But it does signal the unsustainable nature of the current payout schedule. If these asset reserves disappear, that means Social Security's annual interest income disappears, too. The 2017 Trustees report suggests that across-the-board benefit cuts of up to 23% may be needed to sustain payouts without any further cuts through 2091.

That's a genuinely worrisome forecast -- and one that's not filled with misunderstandings.

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