Ready or not, big changes are under way for the Social Security program.
According to the newest Social Security Board of Trustees annual report, released in early June, America's most important social program is on track to pay out $1.7 billion more in benefits than it collects in revenue this year. This would mark the first time Social Security has paid out more than it generated in income since 1982, the year before the last major overhaul of the program was signed into law.
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What's this all mean, exactly? Well, the good news is it doesn't mean Social Security is going bankrupt or is in any danger of disappearing. Two of Social Security's core funding mechanisms -- the 12.4% payroll tax and its necessarily evil, the taxation of benefits -- are expected to generate more income with pretty much every passing year. In an even simpler context, as long as Americans keep working, the payroll tax and taxation of benefits will keep raising revenue that can be disbursed by the Social Security Administration to eligible beneficiaries.
However, this year's net cash outflow is a crystal-clear warning that the existing payout schedule isn't sustainable. As the report notes, Social Security's $2.9 trillion in asset reserves, which have been built up over the past 35 years, are expected to be completely exhausted by the year 2034. If lawmakers don't find a way to bridge the estimated $13.2 trillion cash shortfall between 2034 and 2092, an across-the-board benefits cut of up to 21% may become necessary to ensure ongoing payouts without the need for any further cuts (through 2092). That's a terrifying outlook with more than 3 out of 5 existing retirees reliant on Social Security for at least half of their monthly income.
Social Security myths are running rampant
This predicament in which Social Security finds itself, and the expected draining of its asset reserves, has sent the imaginations of the American public into overdrive. In turn, this has led to a number of falsities about Social Security being spread. For example, there's the belief by a surprisingly large number of millennials that Social Security won't be there for them when they retire. But, as noted, that's not the case. Unless Congress were to change the way the program is funded, it simply can't go bankrupt.
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Likewise, there's the pervasive myth that Social Security's cash is dwindling because its funds are being disbursed to undocumented immigrants. In reality, only American citizens who've earned the prerequisite 40 lifetime work credits are able to collect a benefit. If anything, it's actually the other way around, with some undocumented workers contributing into the program via the payroll tax without ever having an opportunity to collect a benefit.
But if there's a grandiose misconception that tops them all, it would be the belief that Social Security would be much better off if "Congress would put back the money they stole, with interest." Check out any social media post on Social Security, and I can guarantee you at least one person suggests the government keep its hands out of Social Security and repay what it owes the program.
What if Congress paid back all the money it "took"?
So, to entertain this misconception a bit, let's take a closer look at what would happen if Congress actually did pay back all the money it supposedly "took" from Social Security. You'll note I've chosen to put quotation marks around the word "took." That's because there's absolutely no evidence that the federal government stole or otherwise misappropriated a red cent of Social Security's excess cash.
The reason this misconception arose in the first place is because Social Security's $2.9 trillion in asset reserves isn't being held in cash. The Social Security Administration purchases special-issue bonds and, to a much lesser extent, certificates of indebtedness, from the federal government with this excess cash. This cash, which the federal government is therefore borrowing at varied interest rates and maturity dates, is therefore (incorrectly) believed by some Americans to have been stolen, pilfered, raided, or taken from the program with no hope of having it returned.
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Could the federal government return the money it's borrowed from the Social Security program? Absolutely. Redeeming the full value of the bonds and certificates of indebtedness upon maturity would yield every cent that's currently detailed as being in Social Security's investment portfolio.
Allowing Congress to borrow from Social Security is a good thing
But there are a few very good reasons we should hope Congress doesn't pay back all that it's borrowed.
The first problem with that suggestion is that having Social Security's investment portfolio entirely in cash doesn't put the program in any better position. Whether the investment portfolio has $2.9 trillion in cash or $2.9 trillion in bonds and certificates of indebtedness, the long-term cash shortfall for the program would, on paper, be the same. Although, as you'll see in the next point, having cash actually makes things much worse over the long term.
The second issue is that without allowing the government to borrow money, Social Security would be saying goodbye to one of its three funding sources: interest income. For those of you harping on Congress to pay interest to Social Security, the federal government already is. The average yield across its numerous maturities is currently 2.9%. If Social Security were simply to hold cash, the program would be giving up an estimated $78 billion to $83 billion in annual income, according to intermediate-cost model estimates, between 2018 and 2027. This would almost certainly push forward the program's asset reserve exhaustion date from its current projection of 2034.
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Thirdly, holding cash means beneficiaries would lose purchasing power on their Social Security benefits at an even faster pace. A recent analysis from The Senior Citizens League found that the purchasing power of Social Security dollars has declined by 34% since the year 2000. This has a lot to do with the cost-of-living adjustment inadequately reflecting the inflation that seniors are facing. However, if the program were to simply sit in cash, inflation would eat away at the real value of its reserves.
And finally, removing access to Social Security would require the federal government to find other sources from which to borrow. Ultimately, it could make the existing national debt situation that much more precarious.
So, to sum things up: Yes, Congress could pay back what it "took" from Social Security -- but there's absolutely no logical reason you should want them to do this after reading these points.
