Social Security: It’s Still in the Woods
July 31, 2015

Social Security: It’s Still in the Woods

The Social Security Trustees released their new report last Wednesday. Hours later, Huffington Post writer Nancy Altman made a declaration. The “2015 Trustees Report Confirms that Expanding Social Security Is Fully Affordable." Ms. Altman is co-founder of Social Security Works! The organization has the laudable goal of expanding Social Security rather than shrinking it.

I love that goal. As defined benefit pensions disappear the safety net of Social Security will become essential. Note the word: “essential.” It’s different from “important.”

Unfortunately, Ms. Altman must have read too fast. Right there at the bottom of Page 4 in the Overview, under the heading “Conclusion,” the Trustees warn:

“Under the intermediate assumptions, the Trustees project that annual cost for the OASDI program (Old Age, Survivors and Disability Insurance) will exceed non-interest income in 2015 and remain higher throughout the remainder of the long-range period.”

Ms. Altman also missed the significance of a key word: “non-interest.” The trustees use it 34 times in the 24-Page overview. So it’s important. Maybe essential. In the end, it all comes down to cash. So let’s follow-the-money.

Our Social Security program has several income sources. The largest, by far, is the employment taxes we pay. For 2014 it was a whopping $756 billion. After that the program has revenue from the taxes retirees pay on their benefits ($29.6 billion).  It is also credited with interest earned by the securities in the $2.7 trillion trust fund ($96.2 billion).

But crediting interest isn’t the same as receiving cash. It’s just a book entry.

And that’s where the crunch comes. Social Security collected cash of $785.6 billion from the employment tax and the taxation of benefits last year. But it paid out $848.5 billion in benefits— cash benefits that people spent. It also paid the $6.1 billion cost of operating the program.

Nominally, the difference came from interest on the trust fund. As a practical matter, the cash money came from the U.S. Treasury.

That’s where we have a minor problem today. But the Social Security trustees say that retirees will have a much bigger problem tomorrow. Social Security costs, they write, will exceed “non-interest” income in every future year. So the program will become ever more dependent on general tax revenues or future Treasury borrowing. The deficits will deplete the trust fund by 2035, only 20 years from now.

After that, the trustees tell us, benefits would drop to 79 percent of current levels.

Think about that. We have 10,000 boomers turning 65 every day. Nearly half of them are expected to live well beyond 2035. I don’t read that as good news. I bet you don’t, either.

On Page 4 the trustees estimate a 75-year program revenue shortfall of $10.7 trillion.

But forget about the long term. Even today, Social Security depends on cash from the federal government. Here's what the trustees say on Page 2:

“The 2014 deficit of tax income relative to cost was $74 billion and the deficit of non-interest income relative to cost was $73 billion.”

That’s not a crushing amount, but it sure doesn’t say that Social Security is good-to-go for expansion. In fact, the Medicare trustees have examined the increasing need for support from non-program revenue sources every year since 2004. Why? They are concerned about the long-term effects of Social Security and Medicare needing ever more money from general revenue.      

This year you can find those figures on Page 210 of the 2015 annual report of the Medicare trustees. It’s called Appendix F. I’ve written about it before. It reconciles the happy talk of trust accounting with the rubber-meets-the-road cash accounting of the Federal budget.

What does it say?

It tells us that while the assets of the Social Security trust funds increased by $27.1 billion in trust accounting— the happy talk of Ms. Altman— the actual cash cost of the program to the federal budget was $73.3 billion. That’s a little less than a quarter of the combined cost of Medicare programs and Social Security to the broader federal budget: $331.9 billion for 2014.

Bottom line? We have two tasks. One is to make sure current benefits will be payable. The second is to do what Ms. Altman wants: expand benefits for the ever-increasing no-pension generation.

Related Articles

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.