What Does it Matter when Social Security ‘Goes Bankrupt’?

When people think of federal government funding, they often think of the income taxes taken out of their paychecks and the fees paid to do things like mail a letter or get a passport. All this money goes into the General Fund, where it is promptly spent on things like national defense, paving highways and, of course, interest on the national debt.

The government consistently spends more than it takes in from taxes, so it must borrow money, essentially just by printing slips of paper that say: “If you give me $70 for this piece of paper today, I’ll give you $100 a few years from now.”

The federal government also gets money from another source: Social Security insurance.

Social Security collects ‘contributions’ from employees (which are mandatory unless you’re Amish, believe it or not) and from employers (though, in reality, you are still paying the employer’s share in the price of every product you buy).

Social Security also pays out benefits to retirees, the disabled, children and widow/ers to the amount of about $750 Billion per year (or about $24,000 per second, if that makes you feel any better).

For its history so far, Social Security has collected more money in contributions each year than it has paid out in benefits. So, it transfers the excess money to the General Fund, so that the government doesn’t have to borrow as much money for expenditures like national defense, paving highways and, of course, interest on the national debt.

Every Treasury Bill (short-term debt) or Treasury Bond (longer-term debt) adds to the amount owed to the general public (aka, the Public Debt, which right now stands at about $9.3 Trillion dollars, though you can check the exact amount of US debt at TreasuryDirect). For every dollar that Social Security has transferred to the General Fund, the government keeps a record saying: “Dear Social Security, I owe you $1 (plus interest). Your pal, The General Fund.” Right now, the General Fund owes Social Security about $2.5 Trillion dollars.

This money is called the ‘Social Security Trust Fund’. Most people assume that the Trust Fund means that there is a large pile of money sitting somewhere. But in fact the Social Security Trust Fund is nothing but a note from the government saying “Dear Social Security, I owe you $2.5 Trillion (plus interest). Your pal, The General Fund.” That $2.5 Trillion has already been spent on national defense, paving highways and, of course, interest on the national debt.

It’s been a tradition since at least the Carter Administration for the President to announce that Social Security will “go bankrupt” in some year that’s about 30 or 40 years down the road. Most recently, President Obama said that, if present behavior continues, the Social Security Trust Fund will go bankrupt in 2037. But what does “go bankrupt” mean?

The economic downturn of the past couple of years means that fewer people are paying into Social Security (because they have no income) and more people are collecting benefits. In the coming years, the number collecting from the system should bloom as the Baby Boomers start hitting retirement age. So, Social Security’s outlays are rising dramatically, but its income is not going up nearly as much.

If present trends continue, sometime in the year 2016, Social Security will begin paying more benefits than it collects in contributions and the transfers from Social Security to the General Fund will cease. [UPDATE, April 4, 2011: Between the time I wrote this post and now, the government has announced that Social Security is expected to outlay more than it takes in this year, 2011.]

What will happen on that day? Well, nothing special really. The General Fund is obligated by law to pay back the money it has received, so Social Security will continue to make its benefits payments as scheduled. However, to get the money Social Security needs, the General Fund will need to tax people more, borrow more money, or spend less on things like national defense, paving highways, and, well, you get the point.

Each day thereafter, Social Security will need to get paid back more and more from the General Fund. If projections are right, the $2.5 Trillion “Trust Fund”, the promise from the General Fund to supply that much money as needed, will be paid off about 2037 and Social Security will technically be “bankrupt.”

But, what does it matter when the Trust Fund “goes bankrupt”? Every day between now and then the outlays from Social Security will grow faster than the intake. So, the transfers from Social Security to the General Fund will diminish. And the federal government will either need to raise borrowing, cut expenditures, or raise taxes (or, probably, all three).

The fact is: Social Security is on an unsustainable path. And, if you’re on an unsustainable path, when exactly you will hit the wall is irrelevant.

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