Your employer deducts 7.65% from your paycheck each pay period; 6.2% is for Social Security and 1.45% Medicare. They then contribute the same amount for a total of 15.3% and send it to the government.
The government promises that it will use those Social Security funds to pay you a lifetime income once you start taking benefits anytime after age 62.
But there is a problem that sticks its ugly head up whenever the Social Security and Medicare trust funds release their annual report …
The trust funds are running out of money.
The latest report found that both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s. This is due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment.
Social Security’s dilemma
Over the program’s 80-year history, Social Security has collected roughly $19 trillion and paid out $16.1 trillion, leaving asset reserves of more than $2.8 trillion at the end of 2015 in its two trust funds — Old Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.
The DI Fund was facing depletion in 2016. To kick the can down the road until 2023, Congress as part of the “Bipartisan Budget Act of 2015” took a portion of your OASI payroll deduction and gave it to the DI Fund.
The OASI and DI trust funds are kept separate. However, to summarize overall Social Security finances, the Trustees traditionally combine them.
Social Security’s total income, including interest, is projected to exceed its total cost through 2019. The 2015 surplus was $23 billion.
But when you deduct the interest, there was a $70 billion deficit. And this annual deficit will average about $69 billion between 2016 and 2019. What’s more, the number of workers paying in vs. the number of beneficiaries will fall substantially.
With those projections in hand, the Trustees say that the combined trust funds will be depleted in 2034; therefore, income from interest will cease.
After 2034, income from taxes should provide about three-quarters of scheduled benefits through the projection period of 2090.
[Editor’s note: To learn how old you’ll be when Social Security’s funds run out, click here.]
As you can see, interest income is a vital part of the Social Security’s Trust Fund. In 2015, it represented 11% of total trust fund income. But by 2025, it will have fallen to only 7% of the trust’s income.
So you might be wondering how the Trustees invest the money you and your employer send in each pay period.
Three shells and a pea
Some might call this a sleight-of-hand or even Thimblerig, the shell game. But here’s how it works …
The Department of Treasury manages your funds. And by law, it can only invest in “special issues” of the U.S. Treasury.
That means the Department of Treasury is the manager and borrower of more than $2.8 trillion of your money and has a monopoly on where it is invested. So when Congress gets wind that Social Security has extra cash, it tells the Treasury to issue more of its special-issue securities.
And poof … your money heads off to a place God couldn’t find it.
But don’t fret … we just owe it to ourselves.
Maybe this example will help:
Suppose I steal $50,000 from you. I’m $50,000 richer, and you’re $50,000 poorer. But since we’re neighbors, our collaborative wealth hasn’t changed. And if you really make a stink over it, I’ll give you an IOU.
We are the largest holder of our own debt
Experts tell us that we should worry about how much money the U.S. owes other countries. Of the $6.3 trillion total, the top five are:
China $1.2 trillion
Japan $1.1 trillion
Ireland $270.6 billion
Cayman Islands $269 billion
Brazil $251.6 billion
Yet not much is said about the $2.8 trillion our government has borrowed from the Social Security surplus. As a result, your Social Security trust fund is the world’s largest holder of U.S. debt.
Should we be concerned? After all, the Treasuries in the trust fund are backed by the full faith and credit of the U.S. government.
President Barack Obama put doubt in Social Security beneficiaries’ minds when he said this in July 2011:
“I cannot guarantee that those checks [he included veterans and the disabled, in addition to Social Security] go out on August 3rd if we haven’t resolved this [debt limit] issue. Because there may simply not be the money in the coffers to do it.”
Former Treasury Secretary Tim Geithner implied the same thing. He said that if a budget deal wasn’t reached by Aug. 2, seniors might not get their Social Security checks.
How can this be?
According to the Social Security trustees, there was $2.6 trillion in the trust fund. Assuming real assets were in the trust fund, Social Security could mail the checks, regardless of what Congress did about the debt limit.
The answer is that there are no real assets!
We have a hand in each pocket,
and neither one is ours
Congress has borrowed all of your trust fund’s money and spent it. The concept that a flush trust fund will pay retirees for the next 18 years is pure fiction … as it contains nothing.
And the only way the trust fund can get cash to pay Social Security benefits is if the federal government siphons it from general revenues or borrows even more money from central banks to cover the shortfall.
As President Bill Clinton’s own fiscal year 2000 budget admits, those special-issue bonds are not real economic assets. Rather,
“They are claims on the Treasury that … will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.”
Why aren’t politicians worried about paying back Social Security — the TRILLIONS they’ve stolen from the American people?
I say it’s because we’ve let them con us into thinking those slips of IOUs in the Social Security trust fund are worth something. And even more troubling is that we keep sending the same old faces to Congress with the promise they’ll successfully solve all of our problems.
For example, Sen. Harry Reid (D-Nevada) said in 2011 (he was 71 at the time and a politician for 28 years) when asked about the solvency of our trust fund,
“Two decades from now, I’m willing to take a look at it. But I’m not willing to take a look at it right now.”
Wow! Talk about kicking the can down the road.
Wake up, voters … government is not the answer!
Hillary Clinton wants to expand Social Security benefits. Her plan includes increasing payroll taxes on high-income workers, increasing income taxes on high-income beneficiaries and improving benefits for widows and widowers.
In one of her debates with Bernie Sanders, Clinton said,
“We are in vigorous agreement here, senator. We’re having a discussion about the best way to raise money from wealthy people to extend the Social Security trust fund. Think about what the other side wants to do. They’re calling Social Security a Ponzi scheme and want to privatize it. … We both want to make sure Social Security is vibrant and well-funded.”
Donald Trump opposes any changes.
Neither candidate seems to understand, care or have a concrete solution on how to pay back the $2.8 trillion the government has raided from the trust fund.
Trump at least admitted that something needs to be done to put Social Security on sounder financial footing in the long run. But when asked how he will address that problem, he answered with vague generalities,
“You do it by bringing jobs back, by being smart, by getting rid of waste, fraud and abuse.”
But even if the next president and Congress replenish our $2.8 trillion, what are the odds they’ll abscond with it again? Pretty darn high, I’d say.
That’s why we need to get Social Security completely out of the hands of politicians. Social Security taxes should be invested in real financial assets, not government promises to borrow more and raise future taxes.
The Libertarian party’s candidate, Gary Johnson, wants replace all taxes, including the Social Security payroll tax, with a federal consumption tax. He’s open to raising the full retirement age and would sign legislation that would allow 100% of Social Security funds to be self-directed.
There is no denying that people would be better off if they prepared properly for retirement, and put their own money directly to work in a blend of equities and fixed income. That would mean allowing workers to divert their payroll taxes to individually owned accounts, similar to their IRAs or 401(k). Then they’d have a “lockbox” that would really work, a Trust Fund that Congress could never raid.
Tell your senators and representative to stop trying to score cheap political points with pie-in-the-sky promises. The fact is that our nation’s largest retirement program is in trouble. So enough with the name-calling … it’s time for a new, better and privatized Social Security system.
Brad Hoppmann , Posted on October 7, 2016 by Brad Hoppmann