SS May Never Run Out of $$

[mickeyd]

This is the kind of good news that I like to read about. Sure this is just another SS projection, however it may be just as valid as the others that predict doom/gloom.

Guess what? Under the actuaries' low cost projection, the Social Security system never runs out of money.
That said, you might ask the question why this more realistic projection has escaped politicians from both major parties.

False-Alarm: Personal Finance News from Yahoo! Finance

 

[donheff]

Guess what? Under the actuaries' low cost projection, the Social Security system never runs out of money.

But there isn't any real money - just a bunch of IOUs. That was probably OK until we ran up an extra trillion or so in Iraq war IOUs. Now we are seriously in debt. But maybe we can escape through inflation (i.e. pay off the debt in cheap dollars) -- that seems to be picking up.

 

[mark500]

Medicare is in far worse shape than Social Security. SS is a relatively easy fix compared to Medicare.

 

[Lazarus]

Guess what? Under the actuaries' low cost projection, the Social Security system never runs out of money.

But there isn't any real money - just a bunch of IOUs. That was probably OK until we ran up an extra trillion or so in Iraq war IOUs. Now we are seriously in debt. But maybe we can escape through inflation (i.e. pay off the debt in cheap dollars) -- that seems to be picking up.

Social Security began in 1935. We got through WWII, Korea, Vietnam, Gulf War I before this conflict. The Iraq war is not larger than these past conflicts and we survived them as did Social Security. In fact we fought the Vietnam war and went to the Moon at the same time.

 

[samclem]

That was probably OK until we ran up an extra trillion or so in Iraq war IOUs.

I missed the news--Did the government stop spending on everything but the Iraq war? I wonder why this is being singled out? The "free" prescription drug benefit doesn't get mentioned, the other spending escapes examination--but spending on this one (admitedly big and new, but not a big part of govt spending overall) thing seems to come up regardless of the topic. Funny . . .

 

[Khan]

I missed the news--Did the government stop spending on everything but the Iraq war? I wonder why this is being singled out? The "free" prescription drug benefit doesn't get mentioned, the other spending escapes examination--but spending on this one (admitedly big and new, but not a big part of govt spending overall) thing seems to come up regardless of the topic. Funny . . .

Problem is: War in Iraq is off-budget.

 

[ladelfina]

But there isn't any real money - just a bunch of IOUs.

That describes pretty much the entire world financial system..!

 

[Independent]

This is the kind of good news that I like to read about. Sure this is just another SS projection, however it may be just as valid as the others that predict doom/gloom.


False-Alarm: Personal Finance News from Yahoo! Finance

I have two problems with the article.

First, it says that the Trustees projections are unrealistically conservative. The key sentences are:

The intermediate projection assumes that the economy will grow by an annual rate of 2.3% per year between now and 2085. This may be higher than the 1.9% per year that was projected as recently as three years ago, but it is still well below the 3.4% that the economy grew on average between 1960 and 2005.

In the Trustees projections, the "economy" is essentially (number of workers) x (productivity per worker).
From 1960 to 2005, the number of workers grew at an average annual rate of 1.5%.
From 2005 to 2085, the Trustees project that the number of workers will grow at an average annual rate of 0.5%.
The 1.0% difference in the growth in workers is a very close match to the 1.1% difference in economic growth.

There are a number of things that could change the number of workers - higher immigration, higher birth rates, or delayed retirements.
But one or more of these has to change substantially to have an impact on SS.


Second, the "good news" about SS never running out of money is the result of the the interest on the trust fund being so high that it fills the gap between number of workers and number of retirees.
But the interest on the trust fund has to be paid by some sort of federal taxes, probably the individual FIT. (I'm assuming that we're going to run out of the ability to borrow from foreign countries one of these days.)
So, if you don't plan to pay federal income taxes, this really is good news. If you do think you're going to be paying FIT, then it doesn't sound so good.

 

[old woman]

The thing all the doom and gloomers forget is that the boomers will die. The oldest are 62 now in 20 years they will be 82 some will already be dead and the youngest boomers will all be old enough to retire. After that more and more early boomers will die and a few younger ones. Many boomers will be dead before they are 92 so the retired population will get smaller in the next 30 years and continue to get smaller fast the following 10 years until it more workers per retired person. If a young worker isn't planning to retire for 40 years the whole baby boomer SS issue will be history. I am 60 and in 40 years don't expect to have a lot of my peer group.

 

[Midpack]

The cost of wars or spending in general has less to do with Social Security solvency --- the inescapable underlying problem is the worker to retiree ratio. In 1935, there were 42 workers for each retiree. Plenty of places to find this info online, here's just one Social Security: Follow the Math with an excerpt quoted.

In 1950, there were 16 workers paying taxes into the system for every retiree who was taking benefits out of it. Today, there are a little more than three. By the time the baby boomers retire, there will be just two workers who will have to pay all the taxes to support every one retiree.
Fewer workers for more retirees mean each worker bears an increasing financial burden to pay the benefits that Social Security has promised. The original Social Security tax was just 2 percent on the first $3,000 that a worker earned, a maximum tax of $60 per year. By 1960, payroll taxes had risen to 6 percent. Today's workers pay a payroll tax of 12.4 percent.

And for the umpteenth time:

First, the current Social Security system is what is known as a "pay-as-you-go" system. It is not a savings or investment system, but a simple transfer from workers to retirees. The payroll taxes from each generation of workers are not saved or invested for that generation's retirement, but are used to pay benefits for those already retired. The current generation of workers must then hope that when their retirement comes, the next generation of workers will pay the taxes to support their benefits, and so on.

Even at my advanced age, I am planning on 50% of the benefit that my SS statement projects. If the benefits are better, I'll be able to buy chicken breasts instead of thighs & wings...

 

[Independent]

The thing all the doom and gloomers forget is that the boomers will die. The oldest are 62 now in 20 years they will be 82 some will already be dead and the youngest boomers will all be old enough to retire. After that more and more early boomers will die and a few younger ones. Many boomers will be dead before they are 92 so the retired population will get smaller in the next 30 years and continue to get smaller fast the following 10 years until it more workers per retired person. If a young worker isn't planning to retire for 40 years the whole baby boomer SS issue will be history. I am 60 and in 40 years don't expect to have a lot of my peer group.

You are correct about the boomers - they will die eventually. The growth in the retired population slows down, but it never actually shrinks.

The problem for Gen-X is that they didn't have enough children. Just like the Boomers, they're only replacing themselves. The WWII generation had 3 kids per couple, the BB and Gen-X only had 2. That means only 2/3 as many workers to pay taxes.

The SS actuaries take mortality, fertility, and immigration into account when they do their projections. They say that the ratio of retirees to workers never turns around. You can see their numbers at:
2008 Trustees Report: Section IV.B, Long-range estimates

 

[samclem]

Midpack,

Well, to be completely accurate, the SS is not strictly pay-as-you-go. If it were, many of us would have thousands of more dollars in our paychecks over our working lives. For decades the system has collected much more than was being payed out (or what would have been due if it was truly pay-as-you-go), and this excess was loaned to the government to pay the shortfall in general revenues. The government will start paying this back to SS as soon as the SS taxes are less than SS payments to beneficiaries. Where will this money come from? Some combination of the usual three places:
- More taxes
- Cuts in the fed budget (could be anywhere, incl social security payments)
- More borrowing

 

[Midpack]

Midpack,

Well, to be completely accurate, the SS is not strictly pay-as-you-go. If it were, many of us would have thousands of more dollars in our paychecks over our working lives. For decades the system has collected much more than was being payed out (or what would have been due if it was truly pay-as-you-go), and this excess was loaned to the government to pay the shortfall in general revenues. The government will start paying this back to SS as soon as the SS taxes are less than SS payments to beneficiaries. Where will this money come from? Some combination of the usual three places:
- More taxes
- Cuts in the fed budget (could be anywhere, incl social security payments)
- More borrowing

Our deficit today is:

Seems to me that would make it pay-as-you-go...

 

[samclem]

Our deficit today is:

Seems to me that would make it pay-as-you-go...

??

 

[Independent]

Our deficit today is:
[ $ 9.4 trillion ]
Seems to me that would make it pay-as-you-go...

It's not clear where you're going with this. Yes, the Federal gov't in total has spent more money than it has collected in taxes. But the SS portion has collected more taxes than it has paid in benefits. Let's be clear on the components of the $9.4 trillion:

$5.3 trillion of that is "owed to the public" (including bonds held by the Federal Reserve).
The other $4.1 trillion is intergovernmental debt, as follows:

$2.1 trillion is owed to the "Old Age and Survivors" portion of SS
$0.2 trillion is owed to the Disability Income portion of SS
$0.3 trillion to Medicare
$0.9 trillion to Federal civil service and mililtary pension funds
and then a lot of miscellaneous.

http://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_mar08.pdf

 

[aenlighten]

I do expect growth to slow with population

but not by as much as the intermediate projection which is very pessimistic. The reason is productivity tends to rise somewhat as population growth slows. The UK is a good example of this. They have had 2.5% growth over the last 30 years with no population growth. Most likely it is somewhere between intermediate and low cost and since the model isn't accurate enough to predict more than 30 years in the future, action now isn't warranted. In particular, when boomers retire will sizably affect predictions.

The boomers are a transition from a growing population to a stable population so any shortfall will not end with them. While we will pay out more in SS in the future, I see this as a benefit if it reduces the amount we waste on foreign military adventures. The SS midcost projection is for 75% of benefits that will be over 35% larger than current benefits, or slightly more than current benefits. It is possible longer lives in retirement will require an increase in taxes but this would be quite modest. Medicare is the real problem and will require a healthcare solution.

 

[rmark]

'But there isn't any real money - just a bunch of IOUs.'

IIRC, under low cost all benefits are paid out of incoming cash flow, leaving the pseudo trust fund intact.

 

[Midpack]

It's not clear where you're going with this. Yes, the Federal gov't in total has spent more money than it has collected in taxes. But the SS portion has collected more taxes than it has paid in benefits. Let's be clear on the components of the $9.4 trillion:

$5.3 trillion of that is "owed to the public" (including bonds held by the Federal Reserve).
The other $4.1 trillion is intergovernmental debt, as follows:

$2.1 trillion is owed to the "Old Age and Survivors" portion of SS
$0.2 trillion is owed to the Disability Income portion of SS
$0.3 trillion to Medicare
$0.9 trillion to Federal civil service and mililtary pension funds
and then a lot of miscellaneous.

http://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_mar08.pdf

Regardless of what the deficit is, it's considerable --- from there, how much seems beside the point. Is there excess cash (not debt/unfunded liabilities) somewhere to fund social security and if so just exactly where? Companies issue bonds and pay from future income, earnings. Governments issue bonds and pay from future income, ultimately taxes. So SS (and Medicare and every other gubmint benefit) would appear to be strictly pay-as-you-go. Believe me I'd love to learn that "SS will never run out of $$" after all, what am I missing?

 

[laurence]

As always, the answer probably lies somewhere in between. And the solution will be made up of a combination of raising the income ceiling for SS tax collection and reduction of benefits.

One interesting thing for me, my company's pension has an option to take a very large check from age 55 to age 67 and then have it reduce by the amount of my social security benefit. Good option!

 

[kombat]

Our deficit today is: $9.4 trillion

This is, of course, the debt, not the deficit. There's an enormous difference.

 

[ziggy29]

As long as taxes are coming in, of *course* it will never completely run out of money. It just might not have enough income to meet its full obligations.

 

[rs0460a]

You are correct about the boomers - they will die eventually.

Darn - you just ruined my day with that statement ...

- Ron

 

[Midpack]

This is, of course, the debt, not the deficit. There's an enormous difference.

True enough, I should have said national debt. Not sure I follow the 'enormous difference' though as the national debt is the accumulated (net) deficit.

 

[OAG]

The "enormous difference" is in size == otherwise one is part of the other and they are part and parcel the same. I wonder what the "credit rating" would be now versus 10 years ago or will be 10 years from now.

 

[kombat]

True enough, I should have said national debt. Not sure I follow the 'enormous difference' though as the national debt is the accumulated (net) deficit.

The "enormous difference" is roughly the same as the difference between one's mortgage payment and one's mortgage balance.

One is typically many orders of magnitude larger than the other. I'd say that qualifies as "enormous"!