This is part of a week-long series about Social Security. If you want to read the whole series, links are provided at the bottom of this post.
Every few years, we hear the news that Social Security is going to go broke. They have run the numbers, and the money is going to run out.
Of course, it is always going to run out decades from now.
And no one really talks about what it means for Social Security to go broke. So let’s do that now, in a slightly simplified version.
The first thing you have to know is that we pay more into Social Security than we pay out each year and that we have for the last three decades until 2010. The excess funds go to buy Treasury bonds, which pay for other government spending. Those Treasury bonds are what will pay Social Security benefits in years in which other funding is not sufficient.
So did we start tapping into Treasury bonds in 2010, when Social Security taxes didn’t cover benefits? No. Social Security assets generate interest, which is also available to pay benefits. That interest is currently making up the shortfall between taxes and benefits. And it’s doing a fine job of it. We’re still buying Treasury bonds. Current estimates show that we’ll keep buying them, or at least not spending them, up to 2021, another nine years. Then we’ll spend the bonds, which will last another 12 years.
Then, and only then, will we experience a shortfall that will require an increase in taxes (either by percentage or by increasing the portion of income subject to taxation), a decrease in benefits (scaled or by percentage or through means testing), or a subsidy from general revenues. Social Security still would not be broke. It could, in fact, be fixed by doubling the taxes and ever so slightly less than doubling benefits.
That is what happens according to the current estimates. However, there’s something you need to know about the current estimates. These estimates looks a lot like prior estimates, in that they are decades out.
Social Security has been doomed to fail for a very long time without actually getting much closer to doing so. The reason is that the estimates are required by law to be based on very conservative assumptions. We cannot run the risk of going broke, so the reasoning goes, so we must plan very carefully.
But what’s annoying about all of this is that the prediction that Social Security revenues plus the accumulated U.S. securities (yes, the U.S. government, not China, is far and away the world’s largest holder of U.S. securities) will be unable to meet its obligations in 2037*, and only pay out 78 percent of benefits. That estimate comes from a Congressional Budget Office (CBO) report (pdf). But that CBO estimate is based on an annual real GDP rate of growth of 2.5%.
Zoiks! OK, I realize those of you who have managed to stick it out this far might not understand the implications of what a RGDP rate of growth of 2.5% implies (heathens!).
That rate would be so historically abysmal that, since going off the gold standard, we have never had a thirty year period with an average rate of growth of 2.5%. Ever.
This discussion predates the current set of estimates, and the current set of estimates does not show the gains (performance better than expected) we have come to expect comparing various sets of estimates. We have, however, been experiencing a period of dismal economic performance not seen since Social Security was enacted. If this continues, we have much, much more to worry about than when we might run out of Social Security funds squirreled away in Treasury bonds.
If we don’t assume that we have generally reached the end of economic growth in our country, if we don’t assume that this sort of unemployment and underemployment will last for two decades, those estimates are much, much further out, even with the baby boomers retiring and trying to live forever at the same time. There just isn’t that much of a story here…unless your goal is to scare people away from Social Security and into private investment.
In case you haven’t figured it out, that’s the point of all those stories. Next time you see one, look at who is quoted in the story. As with this story posted yesterday, you’ll usually find the expert in question is connected to a conservative think tank.
The day they’re not, then you worry. Until then, relax. Social Security isn’t broke.
The full series: