About social security
For years, Dale Coberly posted on AB about Social Security, separating myth from reality and reminding readers of the reality. Dale stopped posting here a while ago, so I’ll take up where he left off.
I still see folks claiming that Congress “stole” Social Security, that SS is a Ponzi scheme and that SS is bankrupt or will be soon. All myths. Here are some core truths about SS that everyone needs to know.
• SS is separate from the general fund. SS doesn’t affect the federal deficit or national debt. Those who claim we must cut SS in order to balance the budget are lying;
• By law, unexpended SS taxes must be invested in US treasuries. That means that, just like your passbook savings account, the money isn’t sitting around in a box, nor has it been “stolen.” Treasuries are backed by the full faith and credit of the US government;
• There is no account with your SS payments in it, like your savings account or your 401k. Your SS payments were/are being used to pay the benefits of current retirees. Future taxpayers will pay for your retirement. Thus has it ever been;
• Your SS benefit is calculated based on the top 35 earning years. If you haven’t paid in for 35 years by the time you start collecting benefits, a zero is added in for the missing years in calculating your benefit;
• If you delay taking payments after “full SS,” your benefit will increase by ca. 8% per year until age 70. But you will have fewer years to enjoy the benefit, since your sell-by date won’t change. There is no optimal retirement age that fits everyone;
• If no changes are made in tax rates or withholding, the SS trust fund will run out in around 2032. That doesn’t mean SS is bankrupt. It means that projected benefits will drop by 20-25%. There are several ways to fix this. Raising or removing the cap would help, but if you think that means applying the payroll tax to all of Warren Buffett’s and Bill Gates’ income, you don’t understand. The top 1% get most of their annual “income” from investments, which are not subject to the payroll tax. Removing the cap on contributions while capping benefits simply turns SS into a welfare program, a favorite whipping boy of the right.
I still see folks claiming that Congress “stole” Social Security, that SS is a Ponzi scheme and that SS is bankrupt or will be soon. All myths. Here are some core truths about SS that everyone needs to know.
• SS is separate from the general fund. SS doesn’t affect the federal deficit or national debt. Those who claim we must cut SS in order to balance the budget are lying;
• By law, unexpended SS taxes must be invested in US treasuries. That means that, just like your passbook savings account, the money isn’t sitting around in a box, nor has it been “stolen.” Treasuries are backed by the full faith and credit of the US government;
• There is no account with your SS payments in it, like your savings account or your 401k. Your SS payments were/are being used to pay the benefits of current retirees. Future taxpayers will pay for your retirement. Thus has it ever been;
• Your SS benefit is calculated based on the top 35 earning years. If you haven’t paid in for 35 years by the time you start collecting benefits, a zero is added in for the missing years in calculating your benefit;
• If you delay taking payments after “full SS,” your benefit will increase by ca. 8% per year until age 70. But you will have fewer years to enjoy the benefit, since your sell-by date won’t change. There is no optimal retirement age that fits everyone;
• If no changes are made in tax rates or withholding, the SS trust fund will run out in around 2032. That doesn’t mean SS is bankrupt. It means that projected benefits will drop by 20-25%. There are several ways to fix this. Raising or removing the cap would help, but if you think that means applying the payroll tax to all of Warren Buffett’s and Bill Gates’ income, you don’t understand. The top 1% get most of their annual “income” from investments, which are not subject to the payroll tax. Removing the cap on contributions while capping benefits simply turns SS into a welfare program, a favorite whipping boy of the right.
A relative who is a CPA was explaining that the 2032 date is not so dramatic. Let’s imagine a 23% shortfall that year. Her explanation was that in that case the net redemption of bonds was likely covering a very high percentage of that 23% the prior year, when things looked okay. So in 2031 Treasury pumps in maybe 21% of benefits by redeeming bonds. So as soon as the Trust Fund runs out of bonds to exchange, Treasury sees a big lift relative to the prior year. Treasury’s position just got 21% of SS benefits better. If Congress tells Treasury to just keep pumping in that 21%, the Treasury’s position isn’t changed really and SS has a 2% shortfall, not a 23% one. She said if you were running a business you would either not get excited about it or you would get excited the moment you hit any net redemption. If you draw your box around SS and Treasury, it isn’t all that important that SS has a bond to exchange for cash. Not arguing that there should not be a reform, but the 23% number is not what it seems really. She felt that the better question might be how stressful is for Treasury to ramp up from whatever level of net redemption they currently are at to the final level.
@Eric,
LOL!
Your CPA friend has a good imagination. When every sentence is punctuated with “if,” you know you’re dealing in speculation. A CPA license is not a license for prophecy.
In 2032 (or whenever) the SS system is not going to go from enough tax receipts one year to having a 23% shortfall the next. It’s likely to have a very significant shortfall in the prior year, made good by net redemption of bonds….close to the 23%. Those bond redemptions are either general revenue or the proceeds of the sale of more debt. If Congress just directs Treasury to hand over the same cash in 2032 that it will in 2031, the SS gap is way less than 23%. I don’t think she was arguing against reforms really, just pointing out that this “shortfall” in one view is almost exactly an equal positive impact at Treasury. Someone at SSA is yelling “My God, we are $250B short” while at Treasury the pitch deck says “$248B less pressure”.
@Eric,
“If Congress just directs Treasury to hand over the same cash in 2032 that it will in 2031, the SS gap is way less than 23%.”
LOL! And if Congress *doesn’t,* then what. This is just wishcasting.
I’m still locked out of my account …
Ten Bears:
For Angry Bear? Or for your site?
Bill
“Your SS benefit is calculated based on the top 35 earning years.”
I thought it was the 40 quarters with the highest W2 income (i.e., salary and wages). Googling confirms the statement in the post. Did I misunderstand? Did this change at some point?
@marcel,
Top 35 earning years is what I read in the last decade or so before I retired. Don’t know the history before that.
Claude tells me that the 40 quarters I recall is the minimum number of quarters of earnings to qualify for retirement benefits. Since the 1977 reforms took effect (in 1979), the benefits themselves have been based on the top 35 years of income.
@marcel,
Now that you mention it, I do recall the qualification minimum. I’d forgotten, since I’d long ago exceeded that threshold.
Ten Bears:
For Angry Bear? Or for your site?
Bill
Joel, what I am saying is that the disconnect between costs and taxes may be 23% in Social Security, but on a Federal government view it won’t be, because it will ease pressure on Treasury at almost the same rate. I can’t say what Congress will do, nor am I advocating a solution where they just keep handing it over without having a bond to cancel. Just that if they were to do this, there would be a much lower shock to federal finances than a number like 23% suggests. Not trying to replace Dale but from the 2025 report concerning 2024 the OASI fund got $1.16T in tax revenues and had costs of $1.33T. In 2024 Treasury supplied about 12.8% of costs. We are already roughly half-way to “full pressure” and no one worries about their next check being light; Treasury pays the difference. There are historic transactions (bonds) that dictate they must do this, but nothing about the bonds makes the commitment easier to fulfill. So if and when SSA runs out of bonds to hand back to Treasury that won’t matter so much if keeping funding the shortfall is what Congress wants to do. Heck, Congress could direct Treasury to create $1.5T of bonds and give them to SSA, if the bond exchange makes people feel better about this. I agree with Dale’s point that moving the funding of SS away from SS taxes risks eventual alienation for the program.
@Eric,
“I can’t say what Congress will do” Nor can I. Nor can your CPA. There is nothing that compels Congress to make up the 23% or any fraction of it, other than voters.
Treasury doesn’t “pay the difference,” Treasury pays back the loans that SS made to Treasury, with interest. That’s what the “Trust Fund” is. When the Trust Fund runs out, the SS payouts will drop by ca. 23%.
Basically what you’re saying is “if Congress fixes this, it will be fixed.” Can’t argue with that.
I want to know what effect certain micro changes would have.
For example:
1. Raising the contribution amount by 5 basis points.
2. Raising the cap by 3x inflation for the next decade.
3. Reducing future benefit increases by “inflation – 5 basis points”
@Dave,
Dale did a calculation many years ago that addressed query 1, but by now it’s quite out of date. I suspect reducing benefits (3) will be politically unpopular.
dave:
You can not calculate that yourself? When we were more than 10 years out, the increase proposed by both Bruce and Dale was one tenth of 1 percent/per year for ten years. Supposedly, that percent increase would secure Social Security for 60 or so years. Arne would be able to expand on this.
I came into the Bear a year or so before Bruce died. I did not get the whole presentation of it then and learned by reading their posts. You can “by-yourself search for those posts by doing a search on Angry Bear for Social Security.
Joel is making the political argument while Eric is making the monetary argument. Both have merit. Consider the following AI search on fiat money:
the U.S. Congress authorized fiat money, known as “greenbacks”, during the Civil War through the Legal Tender Act of 1862, allowing the Treasury to print paper notes not backed by gold or silver to finance the war, establishing a new system where government declaration gave money value, leading to both funding the Union and causing inflation
Of course we no longer have gold or silver backed money; ALL money is fiat. And now we have computers so the government spends by crediting bank accounts instead of printing money. Just like the government created the money above taxation to finance war spending, it can do so for any necessity (i.e. natural disaster, pandemic, and yes Social Security). The question is will spending above taxation cause inflation and will the politicians ever understand this.
Mark:
Supposedly it would, “Penn Wharton Budget Model and the Bipartisan Policy Center (BPC) project that President Trump’s proposed tax cuts, especially if made permanent as part of recent reconciliation bills, would add roughly $4 trillion or more to the national debt over a decade, with some estimates reaching over $4.1 trillion including interest, significantly adding to deficits. This increased debt comes primarily from extending the 2017 tax cuts and other spending, partially offset by some proposed cuts to other programs, leading to long-term fiscal impacts.”
Bill, I assume when you say supposedly it will, you are referring to deficit spending and the national debt causing inflation and high interest rates. I would debate anyone on this topic but they better be able to answer the question: how does Japan with a debt to GDP ratio of 250% have interest rates on government debt of 1% and an inflation rate in line with the rest of the world? Could one of the economic gurus here please answer this question.
Mark:
Are we as disciplined as the Japanese?
Mark:
We are not as disciplined. Japan has ways to avoid a sovereign debt crunch. I do not believe there can be such a comparison.
Even in manufacturing the US are slackers. That is my realm of expertise.
“Are we as disciplined as the Japanese?“
Who has the higher debt ratio?
Your answer is philosophical, I was looking for an analytical explanation. Thanks.