Search Our Site

Custom Search

March 29, 2010


In a somewhat shocking (but in some cases not so shocking) turn of events last week, the Congressional Budget Office announced that Social Security would run its first deficit this year.  The deficit was originally not projected to hit until the second half of this decade, but has moved up to the present due to the financial crisis and recession.  So, what does this mean for us?  First, we need to understand how Social Security is set up.
Since the Big Fix in the early 1980s, Social Security has been set up as a government run “retirement trust fund” for the country.  Every taxpayer pays into the Social Security system and as a result, gets a paycheck when they turn “of age.”  From 1983 to 2009, taxpayers paid more into Social Security than what was paid out, creating a one trillion dollar surplus.  This was designed so that when baby boomers reach retirement age, there would be a surplus to pay out to them without raising taxes.
However, now Social Security is in deficit and only the very first Baby Boomers are lining up to collect.  By 2029, when the youngest Baby Boomers turn 65, there will be 76 million Baby Boomers collecting Social Security (we should recognize that would exclude the number of boomers who have died, but also add those in the previous generation born before 1946 that will still be alive).
To make matters worse, here is how Social Security is described by Wikipedia:
“Paid-in contributions that exceed the amount required to fully fund current payments to beneficiaries are invested in securities issued by the federal government. The securities issued under this scheme constitute the assets of the Social Security Trust Fund. Because under current federal law these securities represent future obligations that must be repaid, the federal government includes these securities within the overall national debt.[1] The portion of the national debt that is not considered "publicly held" represents the obligations incurred by the government to itself, the bulk of which consists of the government's obligations to the Social Security Trust Fund.”
This means that the government takes your payroll taxes, turns them into bonds (also known as E-Bonds) and then spends the money on something else.  It gets even better, according to the CBO’s website:
“When a trust fund receives payroll taxes or other income that is not needed to pay benefits immediately, the Treasury credits the fund and uses the excess cash to reduce the amount of new federal borrowing that is needed to finance the governmentwide deficit. That is, if other tax and spending policies are unchanged, the government borrows less from the public than it would in the absence of those excess funds. The reverse is the case when revenues for a trust fund program fall short of expenses. Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.”
This means that the deficit this year will come out of the general fund, meaning the government’s projected deficit for 2010 just got bigger.  To make the news even better, it appears as if the new health care program is designed in the same manner.
To illustrate just how negative the Social Security situation has turned, this CBO study from two years ago as the probability of a Social Security deficit in 2010 at 0%.  The same study has the earliest possible year for a Social Security bankruptcy to be 2028.  In light of the new evidence should we move that date up?
Finally, to illustrate the direness of the Social Security issue, this 2003 study shows the fund being exhausted by 2042.  The below charts show the estimates of Social Security income and expenses along with the projected balances.

Efforts to locate the Social Security’s actual trust balance to compare with that of the past 6 years have come up with no data.  If anyone finds numbers, please let me know. 
After reading this analysis, do you feel comfortable trusting part of your retirement to Social Security?

No comments:

Popular This Month