THINKING RETIREMENT – ANDY LANDISSocial Security is not dying, but it’s time to kill off the rumors of its demise.  Let’s take a look at the latest financial report from its Board of Trustees. 

What’s the report? In July the Social Security Board of Trustees released the 2014 Annual Report to Congress.  It gives a 75-year projection of Social Security’s finances, from Social Security actuaries. 

Is Social Security going broke? Far from it.  The Trustees’ Report presents these data:

  • Social Security has $2.76 Trillion in trust fund reserves, similar to reserves held by banks or insurance companies.
  •  Social Security reserves are still growing and will continue to grow through 2019.
  •  Beginning in 2020, program costs are projected to exceed income, shrinking the trust funds.
  •  The trust funds will be exhausted in 2033, the same as projected in the 2012 and 2013 reports.
  •  After 2033, income will cover 77% of scheduled payments.

No way.  There are plenty of articles showing that Social Security has lost money every year since 2010. Read the fine print.  Starting in 2010, Social Security expenses exceeded “non-interest” income—primarily payroll taxes. But that ignores Social Security investment gains.  Do you ignore gains on your investments?  If you take all income into account, Social Security had a surplus of $32 Billion on 2013 operations.

How much does Social Security waste in bureaucracy? 2013 operating overhead was 0.7% of total expenditures, about the same as a discount mutual fund, and that includes Medicare.  It’s been a fraction of 1% for decades.

Is this Social Security’s worst financial report ever? Far from it.  In the late 1970s and early 1980s Social Security ran deficits.  Trust fund insolvency loomed in July 1983.  With just a few months of solvency left, Congress overhauled Social Security finances on April 20, 1983.

Did the 1983 overhaul work? SSA still operates under the 1983 plan, generating surpluses every year since.  The claim in 1983 was 50 years of solvency.  That would be 2033, so we’re right on track 30 years later.

Who are the Social Security Trustees? There are six trustees.  Four are senior government officials:  The Secretary of the Treasury, the Acting Commissioner of SSA, the Secretary of Health and Human Services, and the Secretary of Labor.  Two are public trustees:  Charles P. Blahous III Ph.D. and Robert D. Reischauer Ph.D.  Dr. Blahous is a Stanford economist who served in the George W. Bush administration.  Dr. Reischauer is a Harvard economist and the former president of the Urban Institute.

The Trust Funds don’t exist.  The government stole all the money and spent it, so there’s nothing there but worthless IOUs. It’s real money, invested safely and earning interest, and can’t be used for any other purpose.

SSA has always been allowed only one investment:  U.S. Treasury bonds.  Any bond is an IOU, so it’s true that the trust fund holds only IOUs. It’s also true that the government spent the cash in the fund.  That’s what every bond seller does.  Of course the government repays the principal and interest regularly, just like all other Treasury bonds. Basically, Social Security is a lender agency, not a debtor like the rest of government.

As to the bonds being “worthless,” they are the safest investment in the world, and the government has never missed a payment.  (If you think your own government bonds are worthless, you can turn them over to me or your favorite charity.)

What can be done to strengthen Social Security’s long-term financing? It’s not too difficult to balance SSA’s finances.  There are dozens of proposals, basically boiling down to cutting expenses and/or increasing revenue.

  • Examples of cutting expenses include across-the-board payment cuts, payment cuts targeted to higher-income beneficiaries or family members like spouses and children, and raising the retirement age.
  • Examples of increasing revenue include raising the payroll tax rate, raising the taxable earning ceiling for higher-income workers, and applying income tax to more Social Security payments.

What did they do in 1983? In 1983, Congress used a mix of payment cuts and revenue increases to gain 50 years of projected solvency.

  •  Cuts included raising the retirement age, reducing the payment formula, and eliminating some classes of payments.
  • Revenue increases included raising both the payroll tax rate and the earnings ceiling, applying income tax to benefits, and bringing federal employees under Social Security.

Hundreds of proposals are analyzed HERE.

Why doesn’t Congress fix it? The numbers are fairly easy.  Getting a majority of Congress behind a single plan is hard.  And crunch time is still 19 years away.  I expect Congress to overhaul Social Security in a future odd-numbered year.

Odd-numbered? Think about it.  They need to raise taxes and/or cut benefits.  You don’t do that in an election year.

What should I do? If you’re near Social Security age, don’t panic and take your Social Security early, just because you think it will be broke any day now. If you’re younger, expect to pay more for your Social Security and get less out of it. If you’re extremely pessimistic, don’t plan on zero Social Security—your worst case is you get about ¾ of expected payments.

Where can I learn more? A highly readable press release is HERE.!/post/7-2014-2

The Summary Trustees’ Report can be found at HERE [], with the complete report HERE [].

A plain-English discussion and my humble refinance plan can be found in MY BOOK.

As always, keep on planning.

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