Recently, a friend asked me about the chances of the Social Security system going bankrupt. The subject is not that complicated, but it is a political issue, and thus we have to get around a bodyguard of lies to approach the truth.
The system is financed by payroll taxes. It's likely that many people are not entirely aware of how much income the Social Security system has, since the amounts taken out of every employee's paycheck are less than half of what it takes in. The clearest description of how much the system collects comes from the Socisl Security Administration (SSA) website, http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/240/~/2012-social-security-tax-rate-and-maximum-taxable-earnings:
"For 2012, the maximum taxable earnings amount for Social Security (OASDI) taxes is $110,100. There is no limitation on taxable earnings for Medicare's Hospital Insurance (HI) taxes.
•Employee/Employer
•The Social Security tax rate for employees is 4.2 percent through the end of the year
•The Social Security tax rate for employers is 6.2 percent
•The Medicare tax rate is 1.45 percent for employees and employers
•Self-Employment
•The Social Security tax rate for self-employed is 10.4 percent through the end of the year. The Medicare tax rate is 2.9 percent for self-employed."
[end material from SSA website]
Social Security is not going broke. That's not even a possibility, so long as Social Security payroll taxes are being collected. Of course, if the entire economy crashes and there is no such thing as wages for any kind of job, then Social Security will be bankrupt along with everything and everybody else in a bankrupt society, economy & political system. Short of this catastrophe, Social Security will not go broke. There could be a political decision to end it or drastically reduce benefits, but that's a different question. So long as some people have paying jobs, the SSA can collect some payroll taxes and can pay some level of benefits.
Historically, Social Security has collected more than it paid out. Payroll tax collection began in 1937. The first payouts began in 1940. Since 1937, income to the SSA has generally exceeded its expenses. The surplus has been used to purchase interest-bearing bonds from the United States Treasury. Those treasury bonds are the entire "Social Security Trust Fund."
At the end of 2011, the trust fund contained $2.7 trillion worth of Treasury bonds, an increase of $69 billion from the end of 2010. The bonds are a promise to pay later - both the principal amount and accumulated interest. By the accounting standards of the federal government, this is part of the $16 trillion "national debt."
Nobody counts money stored in a vault to arrive at the $2.7 trillion figure. There is no money in the fund. There is only a series of promises from the federal Treasury. We might say the fund exists only "on paper," to the older generation already retired. We might say it exists only "as a string of ones and zeroes in a computer," to make more sense to several younger generations. In any case, the surplus for each year was actually spent by the federal government on whatever programs other than Social Security the government was paying for - war, highways, agricultural subsidies, whatever.
According to the most recent SSA study, the fund will continue to grow (on paper, or in their computer files) until 2021. In 2012, the fund will pay out only a fraction of the 4.4% interest that is due on the bonds, and the rest of the interest will be added to the fund. Thus the fund will continue growing until 2021, when the payout will finally be greater than the interest income. Still according to the SSA, the fund will be depleted around 2033. Then, payments coming in from payroll taxes will be sufficient to fund only 75% of benefits promised.
We can, for all practical purposes, ignore both the 2033 date and the 2021 date, because both of these dates are derived from a whole set of assumptions about economic growth, inflation, and so on. Just a few years back, the same methods said the fund would be exhausted in the 2040's, not in 2033. Conditions changed, invalidating earlier assumptions. One of the things that changed was a decision to reduce the "employee contribution" rate. Another thing that changed was the rate of employment, from the 2008 financial crisis. The most recent assumptions will also be proven invalid by events and political decisions.
What we can take away from the SSA's financial report is this: current Social Security tax collections currently do not quite cover Social Security payments. The Social Security cash cow stopped producing a surplus, and the Treasury actually has to begin, in the tiniest way, to pay off some of that $2.7 trillion "debt." From the point of view of Republican and Democratic managers of the budget, that's a big problem. For well over 60 years, the program produced a surplus. Now it does not. Instead there is a gap between current collections and payments.
That gap could easily be covered, and covered for the foreseeable future, by simply eliminating the "cap" on payroll tax collections. If people earning less than $110,100 per year can afford to pay 10.4% of their income for Social Security, then surely people earning more than that can also afford to pay the exact same percentage.
If the cap were eliminated, it would also be reasonable to eliminate, by the stroke of a pen, the imaginary $2.7 trillion "Trust Fund" and all the bullshit surrounding it. With or without the Trust Fund, current obligations of the Social Security system have to be paid out of current tax revenues, or financed by increasing debt. That's true now, and it has been true all along.
The "Trust Fund" is a fiction created by rules of accounting, because logically American taxpayers can neither borrow money from ourselves or owe it to ourselves. The purpose of this fiction has been an excuse to allow the surplus collected for Social Security to be spent on other priorities. Now that no longer works, so Republicans and Democrats now have a broad bi-partisan agreement that there is a huge problem with Social Security.
We could eliminate this particular fiction (about trillions of dollars we "owe" to ourselves), and by doing so, we would appear to reduce the national debt instantly by almost 17%. That begins to show how much of an illusion the entire national debt is, even though the government does owe some of it to entities outside the United States. The sleights of hand by which the Federal Reserve creates money and the other deceptions involved in the national debt do get complicated, and involve a lot more than the stability of Social Security.
Whether or not the Social Security system will be an effective guarantee against crushing poverty for the retired and the disabled is a purely political decision. Republicans and Democrats make up a lot of stories to justify their plans for our austerity. The "national debt crisis" and the "fiscal cliff" are only two of them. Don't get me going on their idea of "national security," which is security for the rich and powerful, but not so much for the rest of us.
Short of complete catastrophe, the Social Security system can continue indefinitely, and it will if we force our political "leaders" to continue it. If we don't, it will not continue. It's up to them, until it is up to us.
Full disclosure - I'm 68 and retired. My wife and I are living on Social Security payments and savings. It's an everyday reality for me, so I do the best I can to understand it.
Art Myatt
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