As it now stands, Social Security is fully funded until 2034. After that, it is forecasted to be able to pay only 78% of the benefits due its recipients. This means that recipients would suffer a 12% cut in their monthly payments that year and probably further cuts in subsequent years. Congress is toying with all sorts of fixes, most often:
- Raising the Social Security payroll tax which both employees and employers pay;
- Reducing benefits immediately; or, probably,
- A combination of both.
I’m here to tell you that neither is it fully funded nor are these fixes likely to cure the problem. We must realize “fully funded” doesn’t mean that your Social Security benefits between now 2034 are safe, as, for example, benefits from a defined-benefit pension plan generally are. That’s because, unlike pension benefits which are backed by actual money sitting in trusts, there is no money in a dedicated trust backing our Social Security benefits, though politicians often refer to the Social Security “trust fund”. That so-called trust fund has no money, has only Treasury bonds which represent the money the government has diverted from the Social Security payroll taxes to fund the federal deficit. In fact, sadly, Social Security is -by far- the US Treasury’s largest creditor, owed some $3 trillion . . . three times the debt owed China. The $3 trillion is enough to pay three years’ benefits without any taxes!
So, when you hear that Social Security is about to go broke, keep in mind that it’s a total lie. If Social Security goes broke, it’s because the government took its money and can’t pay it back. It’s not fully funded because the politicians took its money and can’t pay it back. It’s the Treasury that’s going broke, not Social Security.
In effect, Social Security has been “pay as you go” for a long time. As long as its annual payroll tax revenue is sufficient to cover the benefit payouts, Social Security doesn’t need to collect on any of the Treasury bonds it holds. It collects the taxes and it pays out that money in benefits to us beneficiaries, less its administrative expenses, which aren’t bad. Unfortunately, this year, for the first time, the collections are projected to be less than the benefits due us. Furthermore, it appears that this shortfall may well be recurring hereon. Consequently, Social Security now needs to cash-in some of those bonds to cover the deficit. And, therein lies the problem. The Treasury, without an increase in the federal Debt Ceiling, isn’t able to cover those bonds, making its deficit problem a huge problem for Social Security, in essence making the federal deficit a Social Security deficit. Social Security’s $3 trillion in paper assets are useless.
As for the “fixes” under consideration, they’re not what Social Security needs:
- First of all, the increased revenue from the higher payroll taxes will automatically flow into the Treasury’s general fund as will any “savings” from the reduction in benefits. More Treasury bonds -more paper- is all Social Security will net from the additional taxes and the lower benefit payments. It’ll just mean the Treasury’s debt to Social Security will grow faster.
- Secondly, recent history has proven that it’s foolhardy to place so much faith in future forecasts of payroll tax revenues. Payroll taxes are very sensitive to economic downturns, especially drastic ones like the .com meltdown of the late 90s and the 07-08 real estate crash and the recent pandemic crisis. Each of these events drastically reduced payroll tax collections; yet, not one was predicted nor its impact built into the Social Security revenue forecasts.
- And, benefit payouts are similarly difficult to forecast. While it’s fairly easy to model population aging demographics, it’s difficult to predict lifetime extension and nearly impossible to forecast inflation. Clearly, Americans are living longer and advances in chronic disease will only lead to longer life for most of us. Inflation has been tame over the last decade but now appears to be on the upswing. Both of these factors will have major impacts on Social Security payouts and exacerbate the difficulty in forecasting them.
Some have also suggested introducing some sort of voluntary “privatization” option to allow individuals to invest a limited portion of their future benefits in the stock market. Another version of that is to convert some of the Treasury bond debt into higher-yield investments. But, both of these ideas are -at best- tinkering at the edges, not likely to solve the main problem.
So, if higher payroll taxes and/or lower payouts and maybe some sort of privatization option don’t fix Social Security’s looming deficit, what will?
Well, an excellent start to a permanent solution, as you may have already surmised, is to:
- Stop the Treasury from diverting Social Security funds into its general fund; and,
- Make it possible for Social Security to cash-in some of its Treasury bonds as that need arises.
Funny, isn’t it, that neither in all the recent discussions about raising the federal debt ceiling nor in the deliberations over the Democrat’s Build America Act of 2021 did we hear anything about how the resulting additional debt will further endanger Social Security. Yet, the clearest, the best, maybe the only way to save Social Security -the US government’s biggest creditor- is to reduce the national debt.
George Serrano served as president of Canberra Industries, a global leader in nuclear scientific, environmental monitoring, and homeland security systems and services and is a retired colonel with the US Army Reserves.