Whether you realize it or not, America's most important social program, Social Security, is inching closer to disaster.
According to the latest annual report from the Social Security Board of Trustees, the program is looking at a whopping $13.2 trillion cash shortfall between 2034 and 2092. Beginning this year, and continuing in each subsequent year through 2034, Social Security is expected to pay out more in benefits than it collects in revenue. We have to go back to 1982 to find the last time Social Security was on track to produce a net cash outflow in a given year. Between now and 2034, this outflow is expected to completely drain the program's $2.9 trillion in asset reserves that have been built up over the past 35 years.
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If there is any sort of silver lining to pass along here, it's that Social Security is in absolutely no danger of going bankrupt. Social Security's 12.4% payroll tax on earned income of up to $128,400, as of 2018, generated 87.7% of the program's income in 2017, and ensures that there's always revenue that can be collected and disbursed to eligible beneficiaries. Nevertheless, a net cash outflow suggests that the current payout schedule isn't sustainable, which, according to the Trustees report, could lead to an across-the-board cut in benefits of up to 21% by 2034.
What the heck is wrong with Social Security, you wonder? Legitimately, it's a combination of factors that includes the ongoing retirement of baby boomers from the workforce, the lengthening of life expectancies, growing income inequality, and even inaction from lawmakers on Capitol Hill.
What isn't to blame is how the Social Security Administration (SSA) has put the program's $2.9 trillion in asset reserves to work.
For the last time, politicians didn't raid Social Security's coffers
Social Security generates revenue three different ways. As noted, its payroll tax on wage income does the heavy lifting, with $873.6 billion collected in 2017. However, the program also generated $37.9 billion last year from the taxation of benefits, as well as $85.1 billion from the interest earned on its $2.9 trillion in asset reserves. The SSA primarily purchases special-issue bonds, and to a far lesser extent certificates of indebtedness, with Social Security's excess cash. In return, the program is currently generating an average yield of about 2.9%. That was good enough to generate 8.5% of Social Security's income in 2017.
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This "issue" that often arises when discussing these investment holdings is the idea that Social Security cash isn't really there. In essence, the SSA has purchased government-issued bonds with this cash, and the government is using this cash to fund a number of general revenue line items. As a result, quite a few people wrongly believe that lawmakers have raided, absconded with, or otherwise stolen Social Security's funds with no intention of putting them back. If you don't believe me, just read through the comment section on Facebook of any Social Security article I've written over the past couple of years. Guaranteed like the sun rising in the East, at least one person will claim that politicians pilfered Social Security, and that they should pay everything back, with interest.
Of course, the truth of the matter is that the federal government funds a lot of its general revenue line items through the sale of debt. Corporations do the same thing. And, like the federal government, they put the cash they receive from bond sales to work. The thing to realize here is the federal government is already paying interest into the Social Security program for the money it's borrowing and, since these special-issue bonds are backed by the full faith and credit of the U.S. government, it's also never failed to repay a bond once it's matured. Though you can't count up $2.9 trillion in physical cash bills, it doesn't mean this money isn't there.
Here's what would happen if Social Security stopped investing in special-issue bonds
What's more, if Social Security were to stop purchasing special-issue bonds and certificates of indebtedness, it would be saying goodbye to one of its three sources of income.
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According to the intermediate-cost short-range (10-year) model in the 2018 Trustees report for the combination of the Old-Age and Survivors Insurance Trust and the Disability Insurance Trust, net interest earned on Social Security's asset reserves is expected to total $804.4 billion between 2018 and 2027. Without this income, Social Security's asset reserves would be depleted even faster, which in all likelihood would significantly move forward the program's expected cash exhaustion date (currently 2034). The fact that the SSA has chosen to invest these asset reserves in safe, interest-bearing bonds is the entire reason why lawmakers have 16 years to come up with a solution to fix Social Security, rather than a much shorter time frame.
So, to sum things up:
- No, the federal government hasn't raided or stolen money from Social Security.
- Yes, the federal government is already paying interest into the Social Security program.
- No, there are no near- or intermediate-term concerns that the federal government won't be able to fully repay these special-issue bonds when they mature.
- Yes, you should want the SSA to continue to buy bonds and certificates of indebtedness in order to generate revenue for the program.
No conspiracy theories here, folks. It's that simple.
