Social Security Going Bankrupt?

The sky is falling, Social Security is going bankrupt. (Please note that was sarcastic.)

(See here) on the MSN Money website where an article, written by Bill Fleckenstein, appears which attempts to fuel the panic over the solvency of Social Security.

Bill, in a good impersonation of Chicken Little, makes statements such as:
The public pension system's trust fund could go into the red in the next year, far sooner than expected.
Those who've been paying attention have long known there is no money in the Social Security Trust Fund -- it's all been spent.
And again:
As I've already noted, there is no money in the Social Security Trust Fund -- just IOUs from the government to itself.
And then he quotes from a piece that he links to written by Allen Sloan that:
The cash that Social Security has collected from my wife and me and our employers isn't sitting at Social Security. It's gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury's need to raise money from investors.
OK, have you got that? There is no money the the Social Security Trust Fund, evidently Bill wishes everyone to think they need to panic because the Trust Fund is just going to be left holding a bunch of worthless IOU's.

Well, according the Social Security Administration (SSA) the Trust Fund has 2.4 trillion dollars invested in Treasury bonds. Are these bonds worthless? Well conservative investors do not think so. It was only a few months ago that investors thought the Treasury bonds were so safe they were willing to accept a negative return on their investment just to have somewhere safe to park their capital. What would Bill have the Trustees of the Trust Fund do? Put the money in a mattress? Perhaps he thinks the money would be better invested in the stock market or in mortgage related securities?

I do understand that the government has been using the Social Security surplus collections we have experienced in the past couple decades to fund deficit spending in other areas of government. However the bonds issued to the Trust Fund are no more worthless then the bonds issued to other investors. The decision to invest the surplus in government securities might have been an extremely conservative approach, but it turns out to perhaps have been the safest choice as evidenced in the recent collapse in the value of many other investments.

I also understand that if nothing is done, somewhere along the line the Trust Fund will run out of reserves (currently the SSA projects 2037, however this projection might not have yet been adjusted to account for the drastic drop in receipts due to the current economy). However in the meantime, it has 2.4 trillion dollars invested in some of the safest assets on our planet to draw on. What have we been saving all that extra money for all these years past if we were never going to be allowed to draw from these savings when we needed them?

Bill seems to think that it is a catastrophe if the SSA ever has to start drawing on the savings. That 2.4 trillion is not enough and we need to continue rack up never ending surpluses until the end of time.

Now I agree that something needs to be done to ensure Social Security remains solvent after 2037. But I wish to point out that even if nothing is done the system could remain solvent beyond 2037 by reducing payments to 76 cents on the dollar. However such a drastic reduction in benefits for future retirees while current retirees see zero reduction in payments seems a little unfair to me, so I am in favor of a better solution.

What is a better solution? Well I guess that is open for debate. Perhaps it should include some reduction in benefits, some increase in the age at which retirees qualify for Social Security payments and some type of increase in taxes such as raising the maximum amount of employee earnings that are subject to the social security tax (currently set at $102,000). However one thing I am personally going to demand is that any plan includes at least an eventual drawing on the over 2.4 trillion dollars currently invested in the Trust Fund.

If we are never allowed to draw on the trillions we have invested, wouldn't then our continuing to invest in anything be extremely foolish? Certainly some point in the future can be pointed to where the invested assets available would reach zero just at the point that enough baby boomers have passed on so that after-wards the system is in equilibrium or perhaps once again showing a surplus.

I will agree with Bill that the sooner the changes are made to the system the better. For every year we delay coming up with a better solution the more radical the changes necessary become to avoid a drastic decrease in promised benefit payments. However it is my opinion that starting to draw on the surpluses we have accumulated is actually a good thing. Social Security is supposed to be self funding and not for profit. It would be wrong headed to demand that Social Security is never allowed to draw on invested capital and must continue to expand on the 2.4 trillion already invested on in to infinity.

Why in the world did we invest all that money if we are never allowed to draw on the investments we made?


Blogger Todd Dills said...

David, I saw a smidge of the recent Nova program on black holes -- the producers seemed to have taken a page fom the drumming up of fears over Social Security over the years. There is definite justification for tweaking the system significantly, like you said, but I don't think pronouncing coming apocalypse is the way to get that achieved, just as spawning a wave of black-hole apocalypse psychosis is probably not the most responsible way to garner attention to the galaxies. . . Eh?

8/26/2009 09:32:00 AM  
Blogger Little David said...


Yes, something needs to be done to fix Social Security. But the fixes necessary for that program are rather easy compared to getting agreement on how to fix many of the other problems confronting our nation and our species.

8/26/2009 06:41:00 PM  

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