Social Security on the Chopping Block

The White and Congress are presently engaged in heated Fiscal Cliff negotiations. With the national debt exceeding $16 trillion and the CBO projecting continued deficits for the next decade, even Social Security has entered the budget-cutting discussions.

However, Social Security is financed by an independent payroll tax, which solely funds the program. For 75 years, Social Security collected more funds than it paid out. By the end of 2011, that surplus had reached $2.7 trillion. Those surplus funds were used to buy special bonds from the U.S. Treasury, creating the so-called Social Security Trust Fund. This fund is expected to keep Social Security fully solvent until 2033.

Even after that time, payroll taxes are projected to cover approximately 75% of program obligations.

Under current law, the securities in the fund represent a legal obligation the government must honor when the program's revenues are no longer sufficient to fully fund benefit payments.

According to the Social Security Trustees, who oversee the program and report on its financial condition, program costs are expected to exceed non-interest income from 2011 onward. However, due to interest (earned at a 4.4% rate in 2011) the program will run an overall surplus that adds to the fund through the end of 2021.

The problem is that, over many years, the government used the monies slated for the Trust Fund to instead finance its annual budgets. In other words, the $2.7 trillion Trust Fund was transferred to the general fund, which pays the government's everyday operating expenses each year. And it's all gone.

In order to repay retirees the money that was already collected from them, the government will have to redirect money from it's future budgets, or general fund, back to retirees. This is why Social Security is suddenly on the chopping block in current budget negotiations.

Though Social Security is independently funded and does not contribute to the government's annual budget deficits, there are some reasons for concern.

According to the Social Security Administration (SSA), just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67. That will be a heavy burden for the system to bear. It may also force a reexamination of the definition of "disabled" and result in stricter rules for qualifying.

The SSA also notes the following:

• In 1940, the life expectancy of a 65-year-old was almost 14 years; today it's almost 20 years.

• By 2033, there will be almost twice as many older Americans as today -- from 43.4 million today to 75.7 million.

• There are currently 2.8 workers for each Social Security beneficiary. By 2033, there will be 2.1 workers for each beneficiary.

Given longer life expectancies, the coming tidal wave of retirees, and the diminishing number of workers per retiree, it's clear that some changes may be needed by 2033, when the Trust Fund (aka, the money the government collected and spent on other things) is finally exhausted.

In the meantime, the government owes it to its citizens to return the surplus money that's been collected from them, and it is legally obligated to do so. That money will have to come out of other government programs, such as military spending. Regardless, it will surely have to come from elsewhere in the budget.

It should also be noted that the Social Security retirement age is already 67 for those who were born in 1960 and after. That's something that needs to be considered in any negotiations.

One way or another, the government needs to repay the citizens the money it has already collected from them. And it should not attempt to tax them again in order to repay them.