Why Social Security’s Trust Fund Is Vital to Those Approaching Retirement

The author says that Social Security is losing billions of dollars that will one day hit retirees directly in the wallet.

Last August, I contributed an article to MarketWatch which highlighted how Social Security has lost billions of dollars on cash management practices that date back to the era of black and white TV. Since the article was published, the program has lost another billion dollars, and without corrective action those losses will only continue to grow with time.

The red ink is a story of the status quo run amok. Basically, the program has lost billions of dollars because it invests the money on the wrong day of the year. While the entire cash management process needs to be rewritten, we could address the issue of the losses simply by changing the day on which free cash is invested. 

If you depend upon the program, you would be very surprised how little interest there is in a billion dollar of lost interest earnings.

When you talk to policy experts about cash management within the program, you generally find that the response falls into one of two groups:

  1. They believe that a billion dollars a year is small change compared program’s unfunded liabilities of ($16.9T).
  2. Another set tends to believe that the trust fund is not economically relevant because America has “decided to fully honor the obligation to older generations.”

At times, you will hear flavors of both. (see “Experts Say Social Security Will Not Run Out Of Money”)

These arguments somewhat dovetail together. Point 1 means that the financial imbalances in Social Security are so large that the program will have to draw on revenue outside of its normal footprint in order to pay scheduled benefits. Point 2 means that reserves in Social Security are effectively the economic equivalent of parsley because Congress will pay benefits whether there is cash in the Trust Fund or not.

There is a flaw in this line of reasoning. If there had been a decision about honoring the commitments of the past to anyone, the program would not have any unfunded liabilities. Moreover, these gaps would not be growing. In fact, gap has grown by than double the rate of our GDP over the last 20 years, and someone turning 73 today expects to outlive the system’s ability to pay scheduled benefits.

To illustrate how rapidly the situation is worsening, while Trump sat in the Oval Office, the unfunded liabilities grew by more than the system collected in revenue. In other words, Congress could have reduced benefits to zero for the past 4 years, and the program would still have been in worse shape when Trump left office than when he arrived.

Against this backdrop, pundits believe that Congress will step in to prevent any consequence of programmatic insolvency from hitting the public. The argument goes no president or member of Congress could withstand the heat generated by double digit benefit cuts. For these people, the size of the problem within Social Security is irrelevant because Congress will have no choice but to deal with it. 

This dichotomy has two possible resolutions. First, the policy experts are correct and Congress will save the day even if it comes down to the last minute with or without the reserves of the Trust Fund. On the other end of the spectrum, Congress is unable to build public support for a deal in which benefit levels are preserved, leaving lawmakers to find some middle ground of changes acceptable to the voting public. 

These outcomes return us back to the subject of lost interest. The Trust Fund is the only legal obligation that the government has to the program. Every billion dollars of lost interest earnings today means the concession on benefits to future retirees will be at least a billion dollars greater, or the changes will have to take place a billion dollars sooner. In this case, the Trust Fund is very relevant particularly to those approaching retirement.

There hasn’t been a lot of progress on reforming the nation’s largest government program. A significant part of that sluggish response is the belief that Congress will deal with the programmatic shortfall regardless of size, and if we wait, the consequences will fall on someone else, so Congress doesn’t have a lot of incentive to act.

It isn’t that anyone, much less Congress, has determined that the obligations of Social Security to “older” generations will be kept. Congress has determined that there is not sufficient belief in the voting public that a problem really exists, so Congress allows the system to move along on a year to year path with the hope that voters do not wake to the rising imbalances.

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.