What The Latest Social Security Numbers Mean to You

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By on January 9, 2017 in Retirement with 0 Comments

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As FedSmith previously reported, the Congressional Budget Office (“CBO”) published its long-term projections for the Social Security trust funds just before Christmas.

Here is the numbery blah, blah, blah: CBO concluded that the combined Trust Funds for Social Security will be exhausted in 2029, leading to benefit cuts of nearly 30 percent. The cost to fix Social Security rose to as much as 4.68% of payroll taxes.

What it Means to You

The concept of ‘fixed’ in any discussion does not mean ‘fixed’ in the traditional English sense of the word. Fixed typically means that there is no problem. In a discussion about Social Security, it means: the cost to make the problem of current voters a larger one for future voters. In other words, payroll taxes might need to rise to 20 percent just to kick the can again.

There is no certainty in any projection. Typically, you hear that Social Security can pay everything to everyone for 17 years. In reality, we have no idea when benefits will be cut or by how much.

I tend to recommend to people to look at all of the estimates as books on a shelf. CBO’s forecast serves as the conservative book-end of the discussion about Social Security. The Trustees of the Social Security Trust Funds are the optimistic end of the conversation.

Collectively, the experts believe that the program can pay its promises for 12 to 17 years, and at some point retirees will collect 70 to 80 percent of promises.

Both organizations agree that the program will never again draw sufficient revenue from payroll taxes to cover its obligations.

This is a big deal. For my generation, people paid 12.4% of wages, and that sum took care of not only existing retirees but left a little something in the Social Security Trust Fund to pay me when I retire.

That deal is never going to occur again. Since 2010, every penny of payroll taxes has been used to pay benefits of existing retirees. Today a worker contributes 12.4% of wages to a system where there is nothing left over. Above the cost of the program, we now also have to pay-back the “something” that was left over from my contribution from the 1980s.

People bitterly complained about Bush-43’s obsession with debt, which cost the nation about $5 trillion in incremental national obligations – a little less. About $1.4 trillion of that financing came from Social Security. In other words – Social Security was the best customer of the United States Treasury.

Leaving blame aside, during the period of 2009 to now, the government as added nearly $10 trillion in debt obligations. Social Security’s contribution to filling that gap fell to about $400. Basically, Social Security’s role in paying the nation’s bills fell to the range of obscure.

As Donald Trump enters the White House, the national debt will be roughly $20 trillion. While he is in office, all forecasters believe that Social Security will stop financing any aspect of the nation’s debt.

In other words, Social Security will transition from being the best customer of the United States Treasury to a direct competitor.

To illustrate, if you owned, say, a shoe store, you would worry about losing your best customer. Here the problem is exponentially worse. Your best customer is leaving you to open his own shoe store right next door to yours.

In the near future, workers will have to pay 12.4% of wages just to float Social Security. Beyond that, they will need to pay hard income taxes to pay down the money that was borrowed from the Trust Fund, just like the money that was borrowed from private pension, or China, or regular Americans.

Understand, my generation which paid 12.4% of wages complained even though the actual cost was less. We are entering an era when the costs will greatly exceed those that my generation faced.

The blah, blah, blah of the debate about Social Security is when the benefits will be cut. The impact is now, and it is about to be felt by the voters.

For CBO’s explanation of the differences between CBO’s long-term Social Security projections and those of the Social Security Trustees, (see Congressional Testimony of CBO Director Hall )

© 2017 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes, FedSmith.com, MarketWatch, TheHill.com, and regional media like The Denver Post.

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