Friday, May 13, 2011

Will US Government Be Able To Pay Future Social Security Benefits?

“The Social Security trust fund doesn’t have cash. What it has is the government IOUs there, which are as good as gold. But the government has to go out into the marketplace and borrow the money. And so it increases the national debt.” - Erskine Bowles, co-chair of President Obama’s Debt Commission

With the US government so deeply indebted, all manner of deficit-reduction plans are being floated in Washington. Among them, cutting Social Security.

But here’s an important fact: Social Security has never contributed a penny to the national debt.

Social Security is a self-financed program, meaning it doesn’t rely on, or draw from, Congress' annual budget. In fact, Social Security is running an absolutely massive surplus.

Over the past three decades, Social Security collected more in revenues than it paid out in benefits. A lot more. Over that period, $2.6 trillion surplus funds were collected.

Yes, that's the infamous Social Security "Trust Fund".

While this might lead some to believe that this money has been safely locked away in government coffers for future needs, that would be wrong.

As a Congressional Research Service (CRS) report explained in 2000, “Contrary to popular belief, Social Security taxes are not deposited into the Social Security trust funds ... Along with many other forms of revenues, these Social Security taxes become part of the government’s operating cash pool, or what is more commonly referred to as the U.S. Treasury. In effect, once these taxes are received, they become indistinguishable from other monies the government takes in.”

Did you get that? There is no “Trust Fund” after all. If you are a current worker, your Social Security withholdings have already been spent by the government. All of them.

No, those funds didn’t go to current retirees, as most people have been led to believe. They were used to support general government spending for each annual budget.

Your money is gone. Seriously.

As the CRS noted, Social Security revenues are “accounted for separately through the issuance of federal securities to the Social Security trust funds … but the trust funds themselves do not receive or hold money. They are simply accounts.”

Meaning, they are empty accounts. They hold no money.

By the end of last year, those securities, or bonds (or IOUs, to be honest), amounted to $2.6 trillion.

The government is supposed to pay interest for holding your money, just as any bank would. That interest amounted to $117 billion last year and it is supposed to help pay for Social Security benefits.

As previously noted, Social Security is a self-financed program that doesn’t draw from the annual budget or contribute to the deficit.

To the contrary, as the CRS reported, Congress has continually diverted money from Social Security to fund other spending.

However, largely due to high unemployment and the aging of the population, last year Social Security collected nearly $640 billion in taxes, which was less than the $701 billion in benefits paid out. As a result, the system had a “negative net cash flow.”

Another deficit of $46 billion is projected for 2011.

The Social Security Administration estimates that more than 54 million Americans will receive $730 billion in benefits this year. Both numbers will continue to grow over the next two decades.

But so will the accruing interest on those alleged surplus funds, which is supposed to help finance the Social Security program.

However, according to the last Social Security trustees report, in about 14 years from now, the interest earned on the bonds (or IOUs) won’t be sufficient to cover the annual difference between benefits and tax revenues.

At that point, the $2.6 trillion in IOUs will need to be paid out to cover the benefits promised to future retirees. But, remember, that money is already long gone.

The Social Security trustees say the IOUs, or bonds, will be exhausted in 2036. If Congress doesn’t do something by then, benefits would need to be cut by 22 percent to keep the system in balance.

However, the hard truth is that those monies are gone. The bonds are unfunded.

Because the government didn’t save or invest those funds, they aren’t really assets; they’re liabilities.

As the Congressional Budget Office explained in a report to Congress, “The balances in the trust funds (in the form of government securities) are assets to the individual programs (such as Social Security) but liabilities to the rest of the government.”

“When an individual buys a government bond, he or she has established a financial claim against the government,” the CRS said. But “when the government issues a security to one of its own accounts, it hasn’t purchased anything or established a claim against some other person or entity. It is simply creating an IOU from one of its accounts to another.”

In essence, the government has promised to pay back all current workers — with interest — even though it has already spent all the money collected from them.

The IOUs represent the government’s promise to return that money, in the form of benefits, in the future. However, there is no guarantee it will have the means to repay that money.

The government will only be able to pay out future benefits through its current account — meaning its budget, or general fund.

“The general fund has been borrowing from Social Security and we’ve borrowed well over $2 trillion,” said Senate Budget Committee chairman Kent Conrad in February. “That money has got to be paid back. How’s it going to be paid back? It’s going to be paid back by the other general expenditures of the federal government having to be reduced to make way for the payments that we’re going to have to make on those bonds.”

“We’re going to see a dramatic impact on budgets,” said Conrad, because the rest of the federal government’s operations have been “enjoying in effect a subsidy from the Social Security trust fund of several hundred billion dollars a year.”

He concluded, “Instead of having several hundred billion dollars a year coming in from Social Security that we could send somewhere else, those days are over.”

The government’s free ride on the American worker’s Social Security benefits is coming to an end. This will force the government to enact some semblance of fiscal discipline.

But it’s quit evident that the government will not have the revenues to pay for many of the things it is currently budgeting.

The question is, which things?

The numbers just don’t add up. Not even for Social Security. Sixty years ago, there were sixteen workers for every one retiree. Today, there are just three workers for each retiree.

As the CBO reported, “Even with the securities held by the trust funds, and with a dedicated future stream of revenues, by 2039 those resources will be insufficient to pay the full benefits that will accrue under current law.”

Essentially, the US government has made future promises to its citizens that it cannot adequately fund. To do so would mean a crushing blow to its budget, the ability to fund its operations, and to pay its debts to all bond holders — including foreign governments.

Who will be left holding the bag? The American taxpayers?

Expect payroll taxes to be raised, at least for higher income earners.

Expect benefits to be cut, at least for higher income earners.

Expect the eligibility age for collecting benefits to be raised.

Expect the unexpected.


  1. Anonymous3:10 PM

    I think there is a simple solution to the "social security" problem. We should have old people compete in fights to the death, gladiator style, with the winners getting the grand prize of being a "greeter" at WalMart. This would reduce the elderly population AND save money. Plus we could televise the fights and raise money through advertising. I know old people fighting might be boring, but there can't be any less action than in the Pacquia/Mosely fight, and that made a lot of money. In conclusion, I want to say to America, "You're welcome", and enjoy the fruits of my wonderful idea. ~ Dr. "Brilliant" Billy McGenius

  2. Anonymous1:24 PM

    I have heard both sides of this issue. No sources or evidence from anyone. Where can we find the PROOF one way or the other? If there is no "TRUST FUND" then we have been lied too and we are STILL being lied to by many, Prove it! If there IS a "TRUST FUND" then Obama lied when he told the American People "I'm not sure there will be enough money in the coffers to pay Social Security benefits in August if we don't raise the debit ceiling" Which is it? Are we borrowing money to pay Social Security Benefits or not? Are deposits being made to the "TRUST FUND" or not? Unless you can back it up with hard proof/evidence then your claims are as valid as mine - "the money comes from space aliens"

  3. Anonymous7:49 AM

    The government has always been using the social security money and putting government bonds in its place. The problem is that now not only do we not have a giant surplus of cash coming in every year like before but rather the complete opposite mainly due to the baby boom generation retiring which is the biggest workforce this country had, has, and will ever see. All the facts on this article are indeed correct. Most of your investing books cover this topic. Books by Robert Kiyosaki, Donald Trump, Jim Cramer, etc... Source: I read!

  4. The sources are clearly listed in the article: the Congressional Research Service, the Social Security Trustees Report, the Congressional Budget Office, Senate Budget Committee chairman Kent Conrad and Erskine Bowles, co-chair of President Obama’s Debt Commission.

    I'm not sure how you could have read the article and not seen any of that. Perhaps you had your own pre-meditated conclusions and the sources didn't really matter all.