Social Security

Don't Trust the Social Security Trust Fund

|

Congratulations, Social Security: Like so many in America, you're now spending more than you make.

In March, the Congressional Budget Office projected that Social Security would go into a deficit this year. Previous estimates had estimated that the program wouldn't run a deficit until at least 2016; during the Bush years, the program was expected to run deficit-free until 2018.

In a report released this morning, the Social Security's Trustees confirmed that the program will run a deficit both this year and next. This year, outlays will exceed revenue by $41 billion, marking the first time that the program will run a deficit since 1983. Over the next few decades, the report says, the program's trust fund will be drawn down. In 2037, the fund will run dry completely, leaving the program to operate exclusively on tax revenues that are only expected to pay for about three quarters of promised benefits.

Of course, that's assuming you buy the gimmicks that allow the Trustees to claim there's a trust fund at all. As Jacob Sullum argued earlier this year:

The government already has spent all of this money (and then some). All that is left in the "trust fund" is IOUs from one part of the government to another. And guess who has to make good on those IOUs? While there is budgetary significance to this accounting fiction (since Social Security cannot legally continue paying benefits after its notional reserve is officially exhausted), all this talk of a trust fund tends to obscure reality.

Brian Doherty warned that Social Security's "tipping point" was near in Reason last year. More on Social Security reform here.

NEXT: Does Disgraced "Historian" Michael Bellesiles Deserve A Second Chance?

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Social Security is a thing of the past.

    Lou
    http://www.remain-anonymous.at.tc

  2. And of course, this also means that the Treasury just lost a bond purchaser and gained a bond redeemer. A big one, I might add.

  3. But, but…SOCIAL CONTRACT!

  4. Pay off current retirees until they die. Reduce the expectations of future retirees, and tax them less, accordingly. Do this on a graduated scale over 50 years, until the retirees of 2060 will have paid almost nothing into the system, and will be rewarded with almost nothing in return. In the year 2061, Social Security will be defunct, as it should be. You’re welcome.

    1. The “almost nothing” that those folks will have paid will have to be rather a lot more than the “almost nothing” they get in return because it always was a Ponzi scheme.

      You could imagine that they won’t like that…

      1. In my perfect future-world, Americans will be rational and economically literate. They will understand and accept the fact that Social Security was an is a Ponzi scheme, and they will embrace the concept of reduced government payouts in return for less and less taxation to fund the system.

        1. And in your future world, Americans won’t need Social Security because there will be plenty of unicorn meat for the old to eat.

      2. No, it is not a ponzi scheme. SS works just fine in a stable, non-growing economy. Each generation simply claims about 6% of the GDP produced by its children and grand-children.

        SS will start running short of money around 2037, but not wildly short. If we make some haircuts or pass some modest tax increases now, the entire system will be stable indefinitely. Indeed, even with no changes at all, SS finances actually get BETTER after 2040 or so, not worse.

        1. The graveyard’s about a mile to the left; whistling lessons available.

        2. Ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha,ha, ha, ha, ha, ha.

          Oh man….dude, quit it….you’re killing me.

          (Breathes deep).

          OK – So tell me…HOW innumerate ARE you? I bet you can’t balance your checkbook.

          And not to mention the fact that you think it’s ok to enslave others to provide for you in old age. Heck, why not pick on reheads instead of the young. mmmmkay?

          1. Actually, I have a degree in mathematics and once placed in the top 10 in a state-wide mathematics competition.

            Ever heard of the Dunning Kruger effect?

            1. I’ve never heard of Chad, and I wish he’d stop referring to me.

            2. “and once placed in the top 10 in a state-wide mathematics competition.”

              In second grade.

        3. Whoa. Dude. Even anon-bot has more on the ball.

        4. Chad, the base rate of the “not-a-tax” started at less than 4% in total. It’s had to rise repeatedly and now stands at more than 6% each from the employee and the employer (though it is the employee who really pays that because the employer factors it in to wage or salary offers).

          Those changes occurred mostly during the babyboom and their youth and entry into the work force.

          This is you definition of “works just fine”?

          Do you really believe that our bread-n-circuses legislators can deal honestly with the demographic requirement imposed by this insane arrangement? If so, how do you reconcile that belief with the way they have actually managed the surplus generated by the babyboom’s best earning years (i.e. by spending every cent of it and more)?

          Be serious. Please.

          1. Actually, only about 10% of the 12% goes to SS…the rest goes to disability insurance.

            And yes, it works just fine. SS has practically zero overhead, and simply transfers about ~5% of the income of current workers to retirees. Yes, its a ~10% tax, but doesn’t tax all income, resulting in about 5% of GDP being collected. In the future, that will have to either rise to ~6%, or benefits will have to be shaved, or some combination. It does NOT get worse beyond that point, because the boomers begin to fade out of the system and the generational imbalances disappear.

            You are right, though, that conservatives have utterly mis-managed the baby boom’s prime earning years…which is precisely why they should not be allowed to run so much as a dog pound.

            1. You do realize, Math Competition Genius, that “conservatives have utterly mis-managed [utterly, huh? So they couldn’t have mismanaged it any more? –ed.] the baby boom’s prime earning years” isn’t going to get you many points on a Libertarian website, right?

              Anyway, even if Social Security requires taxes of “only” 6% of GDP, well, that number is bigger than you realize. Federal tax revenue from all sources has a ceiling of about 20% of GDP. You can tax like Carter, you can tax like Reagan, but it’s very hard to crack 20%. Your six percent is a third of all the revenue that Uncle Sam is able to raise in a year. Doable, yes, but that doesn’t leave a whole lot of room for other things that you might like the government to do, like provide universal health insurance or regulate the financial industry.

              20% of GDP. That’s what you get to play with. Want to spend six percent of that on FICA? Okay, but that leaves… what, Mathematics Superstar, 14%?

              1. Federal tax revenue from all sources has a ceiling of about 20% of GDP

                No it doesn’t. Plenty of nations (indeed, most industrialized nations) collect much more than this.

                Until Shrub, our tax policy changes were pretty small and offsetting, and really didn’t change much.

                1. “Shrub” — Good, but why not go with the full “Chimpy McBushitler”?

                  We’re not talking about other countries. We’re talking about the federal (U.S.) government. And yes, the ceiling is twenty percent.

                  Now before you provide me with a Wikipedia link that shows that other industrialized countries tax more GDP, remember three things:

                  (1) These countries have fiscal problems with their welfare states that are at least as bad as America’s;
                  (2) Irrelevant; the figure for the federal government is 20%.
                  (3) That doesn’t include state taxes. Money paid to the states isn’t available for federal taxation. You can’t just crank up federal tax collection without running into the state share.

  5. Please don’t even help them maintain the fiction by using the phrase “trust fund”. Of course the fact that the regressive part of the income tax doesn’t bring in enough to pay for welfare-for-old-people any more isn’t really that significant either when you see that the two things are only connected for rhetorical purposes.

  6. I have predicted for years, at least 8, that SS was doomed next year. I based this on a simple bit of math that seems to have escaped all the fiduciary types.

    1946 + 65 = 2011

    I figured once the Boomers started to retire, the system was done. So I was only a year off, which puts me better than anybody else making predictions. Am I qualified to advise the President now?

    1. Am I qualified to advise the President now?

      It’s cute that you think that the “qualifications” are somehow based on anything other than blind loyalty.

      1. 1946 + 65 = 2011. Am I qualified to advise the President now?

        That’s a very sophisticated formula, but no. Sorry.

    2. Am I qualified to advise the President now?

      No. When you added, you forgot to carry the bum. (Props to Firesign Theatre.)

      1. Well, it seems apparent he wouldn’t listen to my advice anyway. I guess I’ll keep at the engineering.

  7. In 2037, the fund will run dry completely, leaving the program to operate exclusively on tax revenues

    Err, the program runs exclusively on tax revenues now. Some of those from the SSI payroll tax, and some are from the income tax or other taxes.

    1. No, it doesn’t, not when there’s a deficit. That means there’s more money being paid to retirees than is taken in through FICA taxes from workers. The difference is made up by cashing in Treasury bonds (the “IOUs” that are much talked about).

      And guess what happens when trillions of dollars of Treasury bonds are suddenly added to the market from a new seller? And that same seller stops buying the trillions in bonds they used to get every year?

      1. Whether those are current tax receipts or downstream tax receipts, they are still tax receipts.

  8. 1. Eliminate early SS eligibility (currently age 62).

    2. Raise the eligibility age (currently 65 and slowly rising to 67 for those born after 1960) by 4-months per year until it reaches 73 and then peg the age to average life expectancy – 4.

    Repeat step 2 for Medicare (mercifully, there is currently no early eligibility for Medicare).

    1. Born 1957 — Current retirement age to get “full” benefits ==> 66 1/2

      So fucking with the system has already begun and the system is still deadmeat.

      1. But it stops at 1960. NAL pointed out that they have already raised it to 67.

    2. 3. Declare anyone born in 1992 or later off the system (for retirement). The 7.65% employee payment becomes 2.65% (1.45% Medicare, 1.2% for SS survivor benefits – someone else can fix those) for them with the other 5% going to a private IRA. Every year, buy out 2 more years worth of payees, by putting their “5%”+2% annual interest into their private IRA.

      Okay, wouldnt start until 2011, so schedule would be like this:

      2011: 1993+ (should be cheap to buy out, most havent paid anything or much in)
      2012: 1991-1992
      2013: 1989-1990
      etc etc
      2020: 1975-1976
      2025: 1965-1966
      2026: 1963-1965
      2027: 1961-1962
      thats the end, because everyone else would already be on SS.

      I would get bought out in 2023. The employer side would continue until no longer needed to fund those receiving SS.

      [Insert Standard Libertarian Disclaimers Liberally]

      1. Hey, that allows us to skip the politics of NAL’s step 2, because we dont have to raise the retirement age at all, because all of 1961+ would end up with a private plan.

    3. That’s actually far more of a retirement age increase than is necessary to balance SS indefinitely. Of course, means testing and some tax tweaks could keep the retirement age increase pretty minimal.

      Also, 1:1 indexing is not appropriate, as increases in life expectency do not necessarily correspond to similar increases in vitality at particular ages. Life expectancy has increased from 30 to 75 in the last few centuries. Does that mean today’s 65 year olds are as vigorous as the 20 year olds of 1776?

      1. My point is that SS should not be thought of as a retirement plan. I actually agree that SS has its value (I know that will probably get me barred from all the hot libertarian hang outs, and all the hot libertarian chicks will have nothing for me but their scorn), but it should be a “last few years of life” plan. People could easily still retire at age 65 or even earlier, but it would be on their own dime. Would it really be asking so much of individuals to save/invest enough so they could provide for themselves for 8 years (assuming they want to retire at 65)?

        Medicare is the much harder problem.

        1. Given the pathetic amounts people have saved in their 401ks, and the pathetic returns they are getting on that money (around 3% over the last twenty years, despite 8% “market” returns), yes, asking most people to have enough to pay for 8 years on their own and THEN have enough to supplment SS indefinitely is indeed a stretch.

          http://www.slaughter401k.com/w…..he-market/

          1. You simultaneously believe:

            (1) People don’t save enough for retirement; and
            (2) We can use means-testing as a tool to make Social Security more solvent.

            You do know that doing #2 will have a deleterious effect on #1, right? Or maybe you think that punishing the ants and rewarding the grasshoppers won’t lead the ants to adopt grasshopper lifestyles.

            1. I don’t understand your logic at all.

              The fact that SS might be means-tested in the future (and that means people like me) forces me to save MORE now, not less.

              1. Then you’re a sucker.

                You tell people that if they save their Social Security payments will be reduced, and you expect that to cause them to save more?

  9. Keynes lied and the economy died.

  10. And guess who has to make good on those IOUs?

    Don’t be looking at me!

  11. all this talk of a trust fund tends to obscure reality.

    No … NO!! All this talk of reality tends to obscure the trust fund.

    1. I have this lock box, see, and my lock box…

      Why are you laughing?
      Come back!

  12. Anyone know how the Chilean privatization program is doing? I havent really read anything about it in over 10 years.

    1. Okay found this, from 2005.

  13. The problem with raising the “retirement age” is that the current one has no basis in reality. People hit their peak earnings in their 40’s or 50’s; most people at age 60 are making less than they did when they were 50. The market will retire you before the government lets you start collecting what you paid in. We’re seeing the effects already – cottontops working at Subway instead of teenagers.

    1. But isn’t that because they just want to supplement their SS earnings and can’t earn too much (lest they start losing benefits)? I know my dad is completely capable of working full time, but because he’s on SS, he chooses to work a part-time job for extra spending money. I have a feeling it’s like that for the majority of seniors in part-time positions.

      1. “But isn’t that because they just want to supplement their SS earnings”

        This may be true for some of them, but I know many folks in their late 50’s through late 60’s who still want to work full-time in their professions and can’t find a job. In most cases they retired and found out that their funds weren’t sufficient. In spite of masters degrees and years of executive experience, the only jobs they can get are McDonald’s, WalMart greeter, etc.

        A company can make a good argument that the 45 year-old they hired who was laid off for a year is better qualified than the 63 year-old they passed up who was retired for two years – the old guy is less “current”.

  14. I wonder what percentage of the population still believes that Social Security is a “savings” plan (which it never was, and SCOTUS made that clear eons ago)? Maybe the perception has shifted such that the majority now sees this for what it is, a direct wealth transfer from the young to the old? That would help explain why no one cares anymore about “Trust Funds” and being in the red.

    I just don’t understand why this fraud has perpetuated for so long.

    1. About the same percentage who believe it is doomed to financial collapse, when it in fact, it is not. It will run a bit short of money around 2040, but the problem is both managable and one that doesn’t get worse over time (it actually gets BETTER, assuming no policy changes).

      Why don’t you go read the trustee’s report before babbling any further.

      1. It will run a bit short of money around 2040,

        Err, Chad, it ran a bit short of money this year, a shortfall filled by taking money from the general fund.

        The general fund will continue to bleed more and more to pay SocSec in coming years, unless we reduce SocSec benefits and/or raise FICA taxes.

        Those transfers from the general fund to SocSec raise the deficit, and are handled essentially by converting the “special” bonds issued to SocSec when it was bleeding into the general fund (rather than vice versa) to regular old bonds.

      2. GMAFB

        From the report:

        Annual cost is projected to exceed tax income in 2010 and 2011, to be less than tax income in 2012 through 2014, then to exceed tax income in 2015 and remain higher throughout the remainder of the long-range period.

        But yet, they can at least cover the deficits with interest.

        Interest earnings on trust fund assets alone will be sufficient to cover the annual difference between cost and tax revenue until 2025.

        And who is paying the interest Chad? The dollar fairies?

        1. Taxpayers, of course. But SS is financially sound for decades, and even when it ceases to be, the problems are quite modest and easily fixed by reasonable policy changes.

          1. I’m not sure on what planet a program that runs at an ever increasing deficit is financially sound.

            Taking that aside, the “reasonable policy changes” (i.e. means testing and retirement age increases) are political dynamite. Good luck with that.

            I support both by the way. I accept that SS is Welfare for old farts. But the American people don’t (I think…thus my original post).

            1. That’s the thing…it DOESN’T have an “ever increasing deficit”. It maxes out in the 2040s, then actually slightly decreases as the boomers pass away. The deficit it will have is completely managable with minor policy changes.

              SS is about 20% welfare, and 80% a simple transfer payment based retirement plan. The middle class breaks even, the wealthy subidize the poor a bit. It is virtually costless and works incredibly well. The overall return is not all that different from what normal investors get in the markets, and it is *far* more certain. Market fluctuations do NOT average out over a typical investor’s lifetime.

          2. please define “sound”, “modest” and “reasonable”

            1. A 25% increase in the portion of your payroll taxes going to SS (about 10%, raising to 12.5%). Or about a 1.5% tax increase applied to all income. Or a 2 year increase in retirement age. Or some combination of these, and perhaps some means testing, or benefit trims (changing how SS is indexed).

  15. Btw, there is a damned good reason to have SS: the markets are an epic failure for small investors.

    http://www.slaughter401k.com/w…..he-market/

    1. If you’re to lie, you ought to try to do it a bit less transparently.
      That link shows investors trailing certain indexes, *not* anything like “epic failure”. Added to that, the supposed ‘authority’ is not shown to be such.
      What’s more is that S/S can’t match *those* returns.
      (yes, I know it can by printing money, but let’s not bother with that argument).

    2. Better to steal their money and put into something that is now basically bankrupt.

    3. But the study in that link shows that the S&P earned an average annual 8.35% over that period.

      The lesson of that study seems to be that small investors need to be educated not to panic (or to simply invest in a S&P 500 index fund).

      I’d also note that the end date of that study was Dec. 31, 2008 which happens to be when all the shit was hitting the fan and it was near market lows (which occurred on Mar. 7, 2009). People were probably pulling all their 401K money out and putting it into cash (taking the loss for fear of losing more…which turned out to be a big mistake). It would be interesting to see the same study performed for the 20 year period ending Dec. 31, 2006. I’m sure that would be much more favorable.

      1. I wasn’t really familiar with Dalbar, but a bit of research shows it’s a financial analysis firm, seemingly financed by financial advisory firms and advisers.
        The intent of the link (and the Dalbar ‘paper’) is that investors make more by hiring the financial advisers (who financed the paper).
        Now, I like business, but I also agree with Mr. Smith; keep your hand on your wallet when a business is trying to sell you something…

      2. If you are counting on “better education” to save the day, you may as well be praying for the tooth fairy to rescue us.

        In any case, you are wrong. It is RATIONAL for small investors to pull their money out of the markets after heavy losses, because they cannot afford to lose more. However, rich vampire squids playing with other peoples’ money can afford to double down, and eventually generate some alpha.

        Just like how the guy holding most of the chips at the poker table holds a huge tactical advantage on each individual hand, rich investors who can afford to ride out downturns hold an advantage over investors whose money literally is their lifeblood.

    4. Why shouldn’t I have the freedom to choose to retire broke?

  16. We’ve heard this before, but this time, I believe it. Our recent/current leadership is out of control and have used these funds as their personal slush money long enough. It’s time for change and in November I hope you will join me in defending our country.

  17. Will you stop with this “no money in the trust fund” stupidity???

    Jeez, you think you can say anything at all and everyone will just nod along???

    The Trust Fund’s “IOUs” are US Treasury bonds – backed by the full faith and credit of the US Treasury. They are as certain to be paid back as any Treasury bond that you hold in your retirement account, or that China holds, or anyone else holds.

    That it may be difficult for the Treasury, and hence the taxpayers, to pay off those bonds is another matter. It has nothing to do with Social Security – or at least nothing more to do with SS as it does with any other bondholder.

    1. Which would you rather hold in your hand: a 30 year treasury bond, or one of the “US Treasury bonds” in the Trust Fund?

      It’s a bit of a trick question, because you can’t hold one of the Trust Fund bonds in your hand. They’re not in circulation. They’re an entirely different class of bonds. Do you know why? For good reason: so Uncle Sam can stiff the Trust Fund without stiffing its preferred creditors.

      If Treasury told the Trust Fund to FOAD, you know what would happen to the value of Uncle Sam’s other bonds? Nothing, because they’re not the same class of bonds.

  18. If any private organization “invested” its pension fund in its own debt instruments, someone would end up behind bars.

    (Unless they were major political contributors of course, but you know what I mean.)

    -jcr

  19. If any private organization “invested” its pension fund in its own debt instruments, someone would end up behind bars.

    (Unless they were major political contributors of course, but you know what I mean.)

    -jcr

  20. Who’s fault is this ?

    Social Security was working fine until the FUND was rolled into the General Treasury. And I hate to say this, but it’s libertarians and Conservatives that NEVER liked the idea of Social Security because of the inherent selfishness in those parties.

    The designers of the Social Security Pyramid completely understood Demographic Diversification. And, that was the primary purpose of a SACRED FUND, that was not to be touched and used for STAR WARS and GULF WARS.

  21. This is too easy. All you need is a government panel of some kind to decide that anyone who is old and isn’t physically and financially “viable” doesn’t get any more health care. The problem is longevity, which has been steadily increasing. Obamacare will solve this problem in a decade, or two.

Please to post comments

Comments are closed.