With politicians calling seniors greedy and rallying for tax hikes, it is difficult to comprehend how something as simple and secure as Social Security could have failed. It is akin to having money inexplicably disappear from your piggy bank. How can seniors be at fault for faithfully putting money in a savings account with a very modest interest rate?
Given average economic conditions, the Social Security Administration reports the trust fund could be insolvent as soon as 2036. Once these monies are exhausted, dollars being paid into Social Security will only cover about 75 percent of obligations being paid out. Two crises stem from the state of the fund, one in the immediate future and one about two decades out.
‘Raiding’ the Social Security Trust Fund
A former boss once told me there is 40 percent truth in everything you hear. Did politicians simply “raid” the trust fund and use the money for other purposes? Yes and no. Surplus funds are used to purchase government bonds so that the principal earns an interest rate. While the money is technically invested, the revenue from the sale of these bonds is used for other budget items. Thus politicians can have it both ways — the money is set aside and re-purposed at the same time.
When bonds need to be claimed to pay Social Security obligations, general tax revenue must be used to pay back principal plus interest. As investor, creditor and bank, the government doubles-down on taxation to support the program. Theoretically there can be a return on investment from the government’s activities, but quantifying that return is much more difficult outside of the private sector.
Changing American Demographics
For many years, money being paid into Social Security exceeded money being paid out. That trend is now reversed and surplus funds are gradually being depleted. As reported in the “New York Times,” for the first time in a quarter-century Social Security ran a deficit in 2010. This change in solvency is due in large part to changing American demographics.
A study by Harvard University shows that the increasing average age tied to the mortality rate in the United States is increasing the draw on Social Security funds. This trend is amplified by a large population of retiring baby boomers and a declining birth rate. There are simply too few workers and too many retirees to sustain the current system, and surplus funds will be drawn down to zero in the next two decades.
The immediate Social Security problem facing Americans is paying back loans from the trust fund in order to cover the deficit in the program. These bonds are due immediately when they are claimed and add to the overall deficit without any tangible benefit. The future problem facing Americans is the absence of a trust fund to cover all outgoing payments.
Simple solutions such as “taxing the rich” and “tweaking Social Security” are ineffective to the point of being non-solutions. Increasing taxes on the middle class and/or reforming Social Security would bring the conversation back into the realm of reality. Courage and tenacity are needed, and sorely lacking, in Washington.