Yes, you’ve probably heard many times that the Social Security system is broken. But that’s not what I mean here. What I mean is that it has now paid out more in benefits than it’s received as revenue. It’s in the red. Up-side-down. Broke.
How do I know that? Bruce Krasting has published the numbers from the Social Security Trust Fund for the first six months of 2010. Total tax receipts from January through June this year are $346.9 Billion while total benefit payments are $347.3 Billion! That’s $400 Million in the red for this period of time.
Cash flow has fallen from $63b to $7b from 2008 to 2010. One might take heart that the number for 2010 is still in the black. But that will not last long. The seasonality of the Fund produces big cash flow losses in the second half of a calendar year. For the full year 2009 the net cash flow was $3.4B. In other words the cash flow fell by $32 billion in the July-December in 2009. It is certain that cash will evaporate in 2010 as well. My number for the net cash flow drain in the second half of 2010 is $55b. This translates to a~$50b deficit for the full year.
Of course there have been many projections that this system wouldn’t actually hit this state for years to come. These projections, however, have been drastically wrong. For instance, as published by the CBO (Congressional Budget Office) in 2008 we have the following predictions (thanks to Ed Morrissey at hotair.com for the excellent resources on this topic in his post):
Today, Social Security’s revenues each year are greater than its outlays, but as the baby-boom generation (people born between 1946 and 1964) continues to age, growth in the number of Social Security beneficiaries will accelerate, and outlays will grow substantially faster than revenues. CBO projects that outlays will first exceed revenues in 2019 and that the Social Security trust funds will be exhausted in 2049.2 If the law remains unchanged, the Social Security Administration (SSA) will then no longer have the legal authority to pay full benefits.
Figure 1 from that document graphs the projection:
That’s only nine years off from a projection made two years ago. What’s the big deal?
Well, folks like me are supporting the system. I’m not quite 40 years old, am self-employed, and expect nothing out of the Social Security Administration by the time I “retire”. In fact, though I put ~15% of my gross income into Social Security, Medicare/Medicaid, I regard retirement as a myth for the middle class of my generation. Here’s a little insert from the SSA (PDF format, 2009) that was included in statements received by those who fund our retirees of this program. Below is an excerpt from this document with the projection of the day:
Will Social Security still be around when I retire?
Yes. The Social Security taxes you now pay go into the Social Security Trust Funds and are used to pay benefits to current beneficiaries. The Social Security Board of Trustees now estimates that based on current law, in 2041, the Trust Funds will be depleted. Because people are living longer and the birth rate is low, the ratio of workers to beneficiaries is falling. Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amounts scheduled.
However, this does not mean that Social Security benefit payments would disappear. Even if modifications to the program are not made, there would still be enough funds in 2041 from taxes paid by workers to pay about $780 for every $1,000 in benefits scheduled.
Hey, a 78% return on investment! What a bargain! Gee, I’m glad to be part of such a well-managed system, courtesy of my most benevolent servants in Washington.
Though I’ve put into this system since I started working various jobs when I was twelve years old, I’d gladly opt out of this broken mess today—and even let them keep what I’ve paid in—if only I could stop paying into this black hole. I get the odd feeling that somehow I could do better than 78% ROI over the next 30 years with 15% of my annual income.
So cash flow at the SSA is now negative, but couldn’t we dig into the holdings of the Social Security Trust Fund? After all, this negative cash flow is almost certainly a result of our current recession, right? Sort of. But there’s nothing in the trust fund. An article by Michael Tanner at the Las Vegas Review Journal has the details:
Thanks to the economic downturn, Social Security is running a temporary cash-flow deficit today. That deficit will turn permanent in just six years. Of course, in theory, the Social Security Trust Fund will pay benefits until 2037. That’s not much comfort to today’s 35-year-olds, who have faithfully paid into the program their entire working lives but will face an automatic 27 percent cut in benefits unless the program is reformed before they retire.
But even that figure is misleading, because the Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs.
Even if Congress can find a way to redeem the bonds, the Trust Fund surplus will be completely exhausted by 2037. At that point, Social Security will have to rely solely on revenue from the payroll tax — and that won’t be sufficient to pay all promised benefits. Overall, the amount the system has promised beyond what it can actually pay now totals $15.8 trillion.
Moreover, Social Security taxes are already so high, relative to benefits, that Social Security has simply become a bad deal for younger workers, providing a low, below-market rate of return. Many young workers will end up paying more in taxes than they receive in benefits. They will actually lose money under the program.
Uh-oh. The trust fund is also broke. Nothing but IOUs that mark how much has been robbed from this fund to pay for other non-budgeted spending. We have no reserves from which to draw to cover the current system deficit.
Why is Mr. Tanner posting this? You’ve probably heard of the coming battle in Nevada for a congressional seat—between Senate Majority Leader Harry Reid and grass-roots candidate Sharron Angle, right? Seeing the imminent catastrophe with Social Security, Ms. Angle has proposed some possible solutions. Mr. Reid, however, remains utterly delusional. Again, from Mr. Tanner’s article:
Sen. Reid’s reaction to every one of these issues so far has been denial. “There is no crisis,” he says. “The program is on solid ground for decades to come.”
Solid ground, eh? I guess Mr. Reid’s faith is in something other than the stark facts. Perhaps his faith is in his fat salary? Or maybe in the printing press at the Federal Reserve? Or maybe in the ignorance of American citizens?
If you’re still reading this, you’re no longer ignorant regarding our Social Security crisis. What will you do about it? Please contact your representatives and speak your mind—and remember to vote in November!