The Truth about Social Security & a Simple Fix

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The headlines read that Social Security is going broke and will run out of money. How bad is it really? Do you want the truth, “you can’t handle the truth”!

Summary:

  1. Social Security is going broke and in will be in debt. But so what, the entire country is in DEBT.
  2. Hello! News flash, since 2010 Social Security has paid out more in benefits than collecting in taxes.
  3. Until 2018 the annual Social Security payments were less than the interest on the roughly $3 trillion of “non-marketable” US government bonds held by the SS trust fund. Starting in 2018 payments are exceeding taxes and interest.
  4. No doubt about it, using simple math by some time in the 2030’s the trust fund will be down to $0. So what!
  5. However Social Security benefits paid vs trust and taxes only has a 1.5% of GDP deficit!
  6. The Social Security Trust Fund is an accounting gimmick.
  7. Read below, what does this actually mean and here’s how to fix it.

I won’t bore you with all of the numbers other than to say the entire US economy has been successfully living in a debt environment for many, many years. It works fine so long as you can keep it under control. Social Security trustees calculate that projecting all SS benefit payments less the trust balance, interest and current taxes leaves a running deficit of 1.5% of annual GDP. Of course long range projections of GDP over 20-40 years can be off by a trillion or so. The SS trust uses census calculations, projects births, immigration predictions, GDP, expected interest rates, etc. A lot of black magic!

The general model is that future employees will be paying for the monthly SS benefits for us retirees, and so on and so forth. The SS trust fund is an accounting gimmick. The fund is made up entirely by “special issue” Treasury bonds, with special interest rates. Oh, but wait, the Treasury prints money and sells bonds to investors worldwide. SS however buys “special bonds”. All of this money still resides within the US government. If the Treasury wants to, they can just increase the interest rate they pay to the SS trust on these “special bonds”.

The entire issue has little to do with the Social Security trust fund itself! How solvent is the entire US government, forget about just the Social Security piece! The government finds a way to live in debt to pay for Medicare (it too has a “trust fund” running out of money), Medicaid, defense, and salaries for the jillions of federal workers who produce NOTHING. This is nothing more than a general US economy  and debt situation. 

The real issue is that we should be concerned about our ability to manage the entire US debt, one way is by growing GDP and let taxes rebalance the equation. Here is an analogy, a family of 4 earns $100,000 a year. They have debt, including a mortgage, car payment and a small student loan. If their annual debt payment is say $20,000 a year are they in trouble? No, of course not. But if that debt payment is $60,000 a year, wow, that’s a real problem. Let’s say the same family has set aside an investment account for the kid’s education and add money to it each month (the equivalent of the SS trust). Nobody would consider the education fund as being completely separate from the parents overall spending and debt issues, right! If that same family with $60,000 in debt has a $250,000 annual income, they’d be fine (increase GDP example)!

Simple Fixes for Social Security:

Social Security is just another government funded program, like ALL government programs it runs on tax dollars. The SS trust is only as good and sound as the entire US economy over time. The US economy is only as sound as US businesses and US worker productivity (the definition of GDP).

Here are some simple things to do to completely FIX the problem:
1. Eliminate the taxable earnings cap over say the next 10 years. Right now SS deductions are capped at reaching $128,400.

2. Gradually raise the Social Security “full retirement age” FRA. Take it from the current 67 to 68, maybe a month at a time.

3. Raise SS taxes from 6.2% to 7.2% over a 10 year time frame.

4. Optional additional steps – suspend Social Security payments to any family earning more than say $2-3 million a year. Maybe even eliminate Social Security for families with over $10 million in liquid net worth.

These above items would not only completely fund the Social Security program for the next 50-100 years but it would also provide a surplus to increase payouts to the poor who get minimal Social Security benefits.

 

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