Myth 1: There is no crisis. Social Security will never be insolvent.
Fact 1: Under the best-case scenario, the trustees report finds that the probability of Social Security never becoming insolvent is less than 2.5 percent.
The only scenario under which the Social Security trust fund will never go insolvent is based on projections which the Treasury Department itself considers to be extremely unlikely.
The above chart plots the trustees’ projections of the future balance of the Social Security trust fund under three scenarios (expressed as a percentage of the annual cost of Social Security).
The purple line plots the trust fund balance under high-cost assumptions, the red line plots the trust fund balance under intermediate assumptions, and the blue line plots the trust fund balance under low-cost assumptions. Which of these projections is most likely to occur?
To determine the likely balance of the trust fund in the future, the Social Security trustees performed stochastic modeling, estimating the likelihood of various exhaustion dates under different assumptions. This modeling concluded that there is less than a 2.5 percent chance that the trust fund will continue to exist beyond 2048. Instead, the middle of the road estimate is that the trust fund is exhausted by 2036.
Myth 2: Social Security won’t contribute to the federal deficit for decades.
Fact 2: Starting this year the program will run a cash flow deficit which will add to the federal deficit.
In theory, Social Security benefits are self-financing with a 12.4 percent payroll tax, but that doesn’t mean the money collected will pay for benefits. This is because when Congress changed the law in 1983 so that in any given year, current taxpayers pay more in taxes than the program needs to pay out benefits, Congress also required that the program invest the difference, or surplus, into a trust fund, which can only invest money in special-issue Treasury bonds.
So what has the Treasury done with the money? Well, the federal government has spent it on its daily consumption: education, loan guarantees, wars, etc. In other words, the government has already spent the money it received in exchange for the IOUs. The most recent projections say that, beginning in 2014, the program will begin permanently paying out more in benefits than it collects in taxes. At that point, the program will start redeeming the IOUs in the trust fund and use them to pay benefits to current seniors until they run out. But remember, the money is not there anymore. So then what? In order to repay the program so it can continue to pay out benefits at the promised levels, the federal government will have to borrow more money, increase taxes to get more revenue, or print more dollars.
The only way Social Security payments to seniors won’t increase future deficits is if the federal government prints more money or taxes the American people a second time to pay back the money it owes to the trust fund. My guess is that the government will borrow more money.