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Sunday, October 30, 2011

The Social Security 'Trust Fund' Myth and SS Is Cash Negative

By Susan Duclos

Lori Montgomery at Washington Post's Business section has a comprehensive four-page piece explaining how Social Security went ‘cash negative’ earlier than expected and how some believe the Social Security "trust fund" has become "fiction of accounting."

IRS explains what a trust fund tax is:

A trust fund tax is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.

Montgomery explains how Social Security went It went “cash negative.”

For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.

What have our politicians done with that money paid into the trust fund?

Social Security is hardly the biggest drain on the budget. But unless Congress acts, its finances will continue to deteriorate as the rising tide of baby boomers begins claiming benefits. The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.

Note: One reason tax revenue has plummeted is because unemployment is above 9 percent, less of a percentage paying into the system compared to an increase of those being paid out of the funds.

From page 4:

Hard numbers tell the story. Social Security supports about 55 million people. By 2035, that figure will swell to 91 million. Today, for every person claiming benefits, there are three workers paying into the system. By 2035, there will be two.

(Chart of the estimated decline of workers per beneficiary from 5.1 in 1960 to 2.1 in 2035- Source: "The Future of Social Security,", Aug. 2009)

They had a plan:

Congress foresaw this as early as 1983. Inflation had driven the program’s costs through the roof. After decades of expansion, Congress finally had to scale back the program, choosing to tax wealthier retirees’ benefits and gradually raise the retirement age to 67.

Those changes, along with other adjustments, restored solvency and promised yearly surpluses that would build up the trust fund in preparation for the retirements of the baby boom. The surpluses were invested in special Treasury bonds, which, by law, must be repaid with interest.

Assuming they are, Social Security can pay full benefits through 2036. Once the trust fund is depleted, the system would rely solely on incoming taxes, and benefits would have to be cut by about 25 percent across the board.

Plan failed.

Several factors have disrupted even that timetable. The recent recession caused the program to go cash negative years earlier than expected. The payroll tax holiday is depriving the system of revenue. And 10 years of escalating debt have crippled the government’s ability to repay the trust fund.

Certner, of the AARP, said it is unfair to cut Social Security benefits to solve that problem.

“The federal government is saying, ‘We’re in the red right now and we’re having trouble paying back Social Security, so we’d like to cut Social Security benefits,’ ” Certner said. “But that’s not the deal.”.

So much for workers being forced to pay into a trust fund and then trusting the government to manage the surplus to ensure it is available to them as promised when they retire.

Montgomery explains more:

Others argue that the deal has long since been abandoned and that the trust fund has become a fiction of accounting. “We can debate until the cows come home whether there’s really a trust fund or not,” said Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School who served on a 2001 presidential commission to study Social Security. “But the fact is, there’s no money available to pay for those benefits. And the system is short on cash now.”

This is why there is a public debate on whether Social Security should be privatized giving retirees the option and the freedom to invest their retirement money in the stock market as they wish, theoretically earning higher returns than with government-invested funds.

Via Social Security, we see that critics of that plan claim that privatizing Social Security is risky because individuals can lose their retirement safety net through bad decisions.

Safety Net? The trust fund that may or may not be there? That is like having a bank account with no money in it, you can claim you have that account but you still cannot write checks from it to pay bills because there is no money!

Shouldn't that be up to the individual as to whether they want the government deciding how to risk that money or if they wish to take the personal responsibility of themselves?

Quick facts:

• Over 40 million post-World-War II baby boomers will reach the retirement age of 65 between 2010 and 2040.

• Since Social Security is an entitlement program and Congress can change the rules regarding benefit eligibility at any time, workers paying into the Social Security system do not have a right to receive Social Security benefits.

• In the past, budget surpluses in Social Security were used by the federal government to fund other government spending.

Politicians cannot continue to ignore addressing Social Security reform.

(Headline change made for clarity and grammatical changes made to post)