Wednesday, April 13, 2016

Social Security and the National Debt

I find it interesting that it's not always clear exactly how things work. I have this bad habit of picking up rocks and very often I'm not terribly thrilled with what I find under the rock.

Let's talk about Social Security.

You pay into SS your working life, and your employer matches what you contribute, with the promise that when the time comes for you to retire you will get a small pension from SS.

Note that this is NOT meant to be your entire retirement income nor even a large part of it but it's not negligible either and can make the difference between an enjoyable retirement and one of financial hardship.

The payroll taxes go into a "trust fund" and there is currently $2.7 trillion in that fund. I put "trust fund" in quotes because like most funds it gets "invested" by the trustees. Notice those quotes again.

So, what us it "invested" in? It's "invested" in special issue US Treasury Securities. This is not something new. This apparently has always been the case.

In other words, the SS Trust Fund consists of IOUs from the federal government. This makes SS the single biggest holder of US debt. SS holds 16% of the National Debt. The civil service retirement and disability trust fund holds 5% of the debt and the military retirement trust fund holds 3% of the debt also I would assume in special issue US Treasury Securities. Another 4% is held by smaller federal funds.

That means that retirement trust funds hold a whopping 28% of the US debt. That's something like $5.4 trillion.

The federal reserve holds 12% of the debt also in Treasury Securities.

But let's focus on Social Security.

SS receives tax income and interest income. In 2014 it paid out $859 billion and received $786 billion in tax income. However it received $98 billion in interest giving it a positive cash flow of $25 billion.

But this is all accounting magic numbers since the "interest" is actually paid by the Treasury Department from tax revenues. We're essentially simply moving money from one bucket into another.

The problem of course is beginning around 2020 the total SS cash flow will turn negative. By 2036 or so the "trust fund" is expected to be depleted. All of the IOUs will have been cashed in.

What is clear from the current situation is first Social Security is NOT a current contributor to the massive US Debt. As a matter of fact it has lent the federal government more money than China and Japan combined.

Second it's about to start turning in those IOUs in the near future which is going to exacerbate the budget deficit problem if something isn't done in the near term while the problem still isn't a crisis.

There are two possible approaches. We can either make up any shortfall in payments by a budget line item by either cutting other expenditures or raising taxes OR we can increase SS payroll taxes by raising either the Social Security maximum, the Social Security percentage or some combination of the two.

I trust Hillary Clinton more to address this problem in a rational way than either Trump, Cruz or any other Republican that's ever been spawned.

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