Of America’s countless social programs, none lifts more people out of poverty each year than Social Security. The Center on Budget and Policy Priorities estimates that in 2021, 21.75 million people, including nearly 15.4 million seniors age 65 and older, were lifted above the federal poverty line because of their monthly Social Security benefits.
Unfortunately, this vital program, which provides benefits to approximately 66.7 million people each month – 49.6 million of whom are retired workers – is on shaky ground.
Image source: Getty Images.
The 2023 Social Security Board of Trustees Report estimates that America’s most important pension program faces a funding shortfall of as much as $22.4 trillion through 2097. In plain English, the Trustees believe that the Social Security program will not collect enough revenue to meet its expenditure obligations (benefits and administrative costs) over the next 75 years.
Furthermore, the Trustees Report estimates that the asset reserves – the excess income collected since inception – of the Old-Age and Survivors Insurance Trust Fund (OASI) could be depleted as early as 2033. If this happens, major cuts to benefits will be necessary. For retired workers and survivor beneficiaries, an increase of as much as 23% may be needed to maintain their payouts through 2097 without the need for additional reductions.
It’s not the brightest outlook for a program that’s crucial to the financial well-being of our nation’s retired workers. The reason(s) behind this $22.4 trillion shortfall in long-term financing obligations may not be what you think.
Has Congress stolen trillions of dollars from Social Security coffers?
Just as the sun rising each day in the eastern sky is a fundamental truth, every prominent article about Social Security on the Internet with a comments section is destined to be filled with claims that the program’s shaky foundation is the result of “the Congress stealing trillions from Social Security.” Security and not paying interest on what they took.”
This thesis argues that if Congress returned the trillions it received with interest, Social Security would no longer face a budget deficit. But is there any truth to these claims?
The very direct answer is not.
When Social Security was signed into law in the mid-1930s, it required that the program’s asset reserves be invested in special bonds and debt securities. In other words, any excess income not paid out to eligible beneficiaries is invested in super-safe government bonds with an interest rate that generates the interest income from the program.
Does the government use the money it receives from these bonds for various items, including defense spending, education, health care, and so on? Absolute. But was this money ‘stolen’ by Congress? No. Every cent is accounted for through the bonds and debt securities.
Assets of the U.S. Old Age, Survivors, and Disability Insurance Trust Fund at year-end, according to YCharts. Data as of December 31, 2022.
In fact, the Social Security Administration publicly updates its investment portfolio every month. At the end of July 2023, the program held $2,856,838,557,000 in asset reserves, with an average interest rate of 2.396%. Extrapolated over twelve months using 2.396%, as the average interest rate would generate $68.45 billion in net interest income for Social Security.
Let me offer a more relatable way for you to think about how Social Security handles its asset reserves. Imagine that you have €1,000 in cash and that you deposit this money at your local bank. Your bank isn’t going to sit on this money and let it collect dust. Instead, it will use your money, along with the money of other savers, to generate interest income and/or make loans. The bank didn’t steal your deposit, and your $1,000 is there whenever you want to withdraw some or all of it.
The same principle applies to social security. The U.S. government is responsible for paying interest into the program, and every previous bond maturity throughout history has been fully repaid. Nothing was stolen; interest is paid; and not a cent is missing.
As a final note, if the government were hypothetically forced to repay its nearly $2.86 trillion in outstanding bonds and notes, Social Security would lose tens of billions in annual interest income. In short, the financial situation would be much worse, as the excess money would simply collect dust in the proverbial vault and lose purchasing power due to steadily rising prices for goods and services.
Image source: Getty Images.
These are the real reasons why the foundation of social security is collapsing
The idea that Congress is stealing Social Security and not paying interest is a complete myth. However, there are tangible reasons for Social Security’s problems, many of which may be related to long-term demographic shifts.
For starters, the fertility rate in the US has actually fallen to a record low. The ‘fertility rate’ describes the number of births a woman is expected to have during her lifetime. In 2007, this figure was still above 2. By 2021, the fertility rate in the US had fallen by more than 20% compared to 2007 levels.
There are numerous reasons behind fewer births in the US, including couples waiting longer to get married, fewer unplanned pregnancies, greater access to contraceptives, and even economic uncertainty (e.g. the Great Recession and the COVID-19 pandemic). Fewer people in the labor market a generation from now means an even lower ratio of workers to Social Security beneficiaries.
More than halving net immigration to the US is another major problem for Social Security. Legal immigrants tend to be younger and therefore spend decades in the workforce, generating much-needed payroll tax revenue for the program. But over the past quarter century, net legal immigration has declined by 57%.
To dispel another myth: undocumented workers contribute positively to social security through payroll taxes, but are not eligible for a cent back in traditional benefits.
Income inequality is another major problem for social security. In 2023, all earned income (wages and salaries, but not investment income) between $0.01 and $160,200 will be subject to the 12.4% payroll tax responsible for funding Social Security. About 94% of working Americans will not make $160,200 in income this year, meaning they will pay taxes to Social Security on every dollar they earn.
By comparison, earned income above $160,200 is exempt from payroll taxes. In 1984, 91% of all professional income was subject to payroll tax. But as of 2021, only 81% of earned income was affected by the 12.4% payroll tax. In other words, as time passes, more and more income ‘escapes’ from payroll taxes.
Congress’ inaction can also be added to this list. The longer lawmakers wait to act, the greater the shortfall in Social Security’s funding obligations will become, and the more painful the eventual solution will be for working Americans and retirees.
There is no doubt that Social Security has problems. The myth that Congress has a hand in the Social Security cookie jar is simply not one of them.
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