Michael1942's Blog

This Title line at first glance conjures up a different idea than the actual story below.MA

Sean Williams 3 hrs ago

For better or worse, Social Security is the financial foundation responsible for supporting tens of millions of retirees, as well as millions of long-term disabled workers and the survivors of deceased workers. Of the nearly 63 million people currently receiving a benefit check, more than a third are being kept out of poverty as a result of the added income they’re receiving from the program.
Yet for as important as Social Security is, it’s also about to encounter its biggest speed bump since being signed into law back in 1935.
Social Security’s problems come to a head
Every year, the Social Security Board of Trustees releases a report examining the short-term (10 year) and long-term (75 year) outlook for America’s most important social program. Since 1985, it’s been warning that long-term revenue wouldn’t be sufficient to sustain the existing payout schedule, which includes assumptions for annual cost-of-living adjustments. Ongoing demographic changes that include the retirement of baby boomers, increased longevity, lower fertility rates, and growing income inequality, are adversely impacting Social Security.
According to the June 2018 report, the program is soon expected to begin paying out more money than it collects each year. The last time we saw a net cash outflow from Social Security was back in 1982. While these net cash outflows will be relatively small at first, compared to the $2.9 trillion currently held in asset reserves, they’re expected to grow in size by 2020 and beyond.
Based on the estimates of the Trustees, Social Security’s $2.9 trillion in asset reserves will be completely gone by 2034. Should lawmakers not find a way to raise additional revenue and/or cut expenditures by then, an across-the-board cut in benefits of up to 21% may await. That’s particularly worrisome, given that 62% of retired workers rely on their benefit check to account for at least half of their income.
Is Congress really the problem?
How has Social Security gone from being such a successful program to an outright mess? One postulation is that the federal government is to blame.
You see, the Social Security program has accrued close to $2.9 trillion in net cash surpluses since its inception, with nearly all of this amount being generated over the past 35 years. Put another way, the program has collected more money than it’s expended every year since 1983.
Where is this money? That’s the big point of contention. By law, these net cash surpluses are required to be invested in special-issue government bonds and, to a lesser extent, certificates of indebtedness. In return, the federal government gets access to $2.9 trillion in borrowing capacity that it can use for normal line items in its budget. In other words, Social Security’s Trust has $2.9 trillion in asset reserves, but not a red cent of cash in the vault, so to speak.
Some folks have called for the complete repayment of this borrowing, with interest, and have suggested that the Social Security program would be just fine if Congress complied with this request.
But is this correct? Has Congress pilfered $2.9 trillion (or more) from Social Security and put the program between a rock and a hard place? Well… no.
The federal government hasn’t pilfered a dime from Social Security
The fact is that Congress, despite borrowing $2.9 trillion from Social Security, hasn’t pilfered or misappropriated a red cent from the program. Regardless of whether Social Security was presented as a unified budget under Lyndon B. Johnson or as a separate entity (i.e., off budget), none of its funding has been conflated with normal federal spending.
What’s more, Social Security is already generating interest income from the federal government on its borrowing. As of Dec. 31, 2018, the $2.9 trillion in special-issue bonds and certificates of indebtedness were yielding an average of 2.85%. Since these bonds range in maturity from 1 to 15 years, there’s plenty of opportunity to take advantage of rising yields and adjust the program’s bond investments as needed.
Ultimately, Congress’ borrowing allowed Social Security to collect $85.1 billion in interest income for 2017, and it’s expected to provide $804 billion in aggregate interest income between 2018 and 2027. In other words, when opponents of this borrowing complain about the program not receiving interest, they’re simply not doing their homework.
Making matters worse, some folks want to see this borrowing repaid in full. Doing so would require the federal government to find $2.9 trillion in borrowing elsewhere if that happened. But more importantly, it would deprive the program of valuable interest income, pushing Social Security into the red very quickly. Cash sitting around in a vault would do no one any good as it’d be losing purchasing power almost every year to inflation.
Lastly, regardless of whether Social Security owns government-issued bonds or cash, it doesn’t change the asset reserves held by the program. It’s $2.9 trillion either way. To suggest that repaying these bonds would put the program on more solid footing is simply not correct, as it’d have no impact on the program’s total assets, and it would actually hurt its revenue-generating prospects.
Long story short, Congress is in the clear on this one.

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