Bad news, folks. Social Security just had its latest "physical," and things don't look so hot.
The Social Security Board of Trustees has been issuing an annual report on America's top social program since its inception. This report looks at the short-term (10-year) and long-term (75-year) solvency of Social Security, taking into account monetary and fiscal stimulus shifts in the U.S. economy, as well as long-term demographic changes, which can include birth and death rates, labor participation, and so on. The idea being to provide lawmakers with an up-to-date and relatively accurate look at what the future may hold for a program that many older Americans have come to count on to make ends meet.
In April, when the 2019 report was released, the Trustees noted that the program's $2.89 trillion in asset reserves -- i.e., its aggregate net cash surpluses since inception -- are expected to be completely exhausted by 2035, a year later than was forecast between 2015 and 2018. While a smidgen of good news, it still suggests the inevitable. Namely, that the existing payout schedule isn't sustainable, and that benefit cuts of up to 23% may be headed retired workers' way within the next 16 years.
These two topics have nothing to do with Social Security's current predicament
While there are many unknowns about Social Security, probably the biggest and most consistent question is: What caused a once-promising program to get into such a mess? While there's no single answer, there are two things that absolutely didn't cause Social Security's current dilemma.
1. Government borrowing has had a positive impact on Social Security
Next to the idea that Social Security won't be around when millennials retire (which is false), the most pervasive, ongoing Social Security myth suggests that congressional borrowing of the program's asset reserves are to blame.
As the story goes, beginning with President Lyndon B. Johnson, Social Security was put on-budget, and its contents were raided by the federal government to fund wars. This money has never been paid back, and its absence is the sole reason that the Social Security program is in deep trouble. If Congress were to pay this money back, with interest, there would be no need to discuss possible benefit cuts.
If you're wondering how I know this story so well, it's because I see it written dozens of times daily on various social media platforms that post about Social Security topics. The only problem is that it's wrong. Very, very wrong.
There are only two snippets of truth to the ongoing myth that Congress stole from Social Security. The first truth is that Lyndon Johnson did move Social Security on-budget (where it remained until 1990), but only did so at the recommendation of his Commission on Budget Concepts, because there was no uniform federal budget at the time, and there were three different federal budgets making the rounds of Capitol Hill. It was confusing, and moving Social Security on-budget was the easiest fix. But even with this move, Social Security's funding remained confined to the program and not conflated with federal funds.
The second sliver of truth is that the federal government has borrowed Social Security's $2.89 trillion in asset reserves, although it uses the money it borrows to pay for all types of budget line items, and doesn't earmark cash for any specific purpose, including wars.
But what you may not know is that this borrowing is required by law. When the Social Security Administration generates a net-cash surplus, it's required to buy special-issue bonds from the federal government with this cash. These special-issue bonds are backed by the full faith and credit of the U.S. government, and are considered especially safe investments. More importantly, they're providing Social Security with an average interest rate of 2.84% on its invested assets. This means that Congress is, and has been, paying interest on what it's borrowed from the program.
Equally important, you should understand that changing asset type doesn't change asset value. Regardless of whether Social Security had $2.89 trillion in cash, or $2.89 trillion in bonds, the program has $2.89 trillion in excess assets. If the government were to pay what it owes, the program would lose out on around $800 billion in projected interest income revenue over the next decade, but the value of its asset reserves would be the exact same. It does nothing to help Social Security, but would, in fact, make things worse.
If you want to blame the government for something, point your finger at lawmakers lollygagging on a Social Security solution and failing to find common ground because of political hubris.
2. Immigrants, including undocumented workers, have a net-positive impact on Social Security
You know what else isn't to blame for Social Security's imminent cash crunch? Immigrants -- legal and undocumented.
If folks aren't complaining about the government raiding Social Security's coffers, they hoist the blame of the program's cash crunch on a rise in immigration, or opine that illegal immigrants receiving benefits are the downfall of the program. The problem is that the data shows otherwise, for both legal and undocumented workers.
One of the many factors the Trustees explore when preparing their annual outlook is net immigration. While some people might feel that legal immigration creates an economic burden on society, it's a positive for Social Security. Most legal immigrants tend to be younger, which means they're able to contribute to the labor force for decades to come, providing valuable payroll tax to the Social Security program. The payroll tax was responsible for roughly $885 billion of the just over $1 trillion collected by Social Security last year.
And based on the Trustees' estimates, the more legal immigrants our country lets in, the better the long-term outlook becomes for Social Security. The median estimate of 1.265 million net immigrants a year suggests an actuarial deficit of 2.78% over the next 75 years. The actuarial deficit describes the amount that the payroll tax needs to rise today in order to avoid any benefit cuts, as well as keep the trust fund ratio at 100% by 2093. But if we let in 1.601 million net immigrants a year, the 75-year actual deficit declines by an estimated 23 basis points to 2.55%.
Not only are legal immigrants an overwhelming positive for the program, but undocumented workers have also provided under-the-radar perks. Because undocumented workers have no pathway to citizenship, they won't be able to get a Social Security number (SSN) -- and without an SSN, they won't be able to receive benefits. Period. I repeat, undocumented immigrants can't receive a traditional Social Security retired worker, disability, or survivor benefit. They may apply, and be approved for, a Supplemental Security Income (SSI) benefit, but SSI is funded separately from the traditional Social Security program, and the two shouldn't be conflated.
Despite not being eligible to receive a benefit, undocumented workers do pay an average of $13 billion a year into Social Security via the payroll tax by using a friends' SSN or a fake SSN. Again, these workers have no means by which to receive a traditional Social Security payout, but they're regularly contributing more than 1% of annual revenue collected by the program.
Ultimately, there are plenty of things you can blame for Social Security's imminent cash crunch. Congressional borrowing and immigration, though, aren't among those.