4 Questions (And Answers) About Social Security

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Few financial issues are as sensitive these days as social security, particularly the threat of lost benefits to current or future retirees. Listen to various politicians and “pundits” and you might very well come to the conclusion that the social security trust fund is broke and contains nothing but IOU’s.
Assembled here are some of the most common statements made about social security, and the real story behind them.

 

1) True or False: Assets in the social security trust fund receive a low return.

True. While Congress permits investment of social security assets to prevent devaluation due to inflation, the only approved investment is U.S. Treasury Securities. Lately, U.S. Treasuries have had yields of just about nothing, at least short-term bonds. By investing in longer term bonds, the trust fund was able to generate over $100 billion in interest income in 2012, or about a 4% return, which wasn’t terrible, but lagged far behind U.S stock market indices, which had returns in the low to mid teens.

 

2) True or False: The social security trust fund is broke.

False. Up until 2011, the fund’s income through tax payments exceeded benefits payments, which meant the fund grew in size every year. 2012 marked the first year benefits outpaced tax revenue, but when other sources of income, including interest, were added, the fund grew. Eventually, perhaps this year, the size of the fund will begin to pay out more than it has taken in.

 

3) True or False: Social Security adds to the National Debt.

 False. The social security fund cannot borrow money to meet its obligations, as the Federal Government can. Expenses can only exceed income if there is money in the fund to pay the difference. Once that money runs out, expenses must be reduced or income must be increased.

 

4) True or False: The trust fund will run out of money in the mid-2030’s

 Kind of True. Given no change to current and projected income and benefits, the social security trust fund is projected to run down to $0 in 2032, about the time the last of the baby boomers reach full retirement age. That does not mean retirees will be totally cut off. It means the social security administration will have to lower benefits to match income. Given no other changes in the next 17 years that might extend the life of the reserve fund, benefits will have to be reduced to around 72% of promised amounts.

 

On paper, there are many simple fixes that could keep the fund solvent for many decades to come, including an increase to the benefit eligibility age for younger workers (who have longer life expectancies) and raising the cap on income subject to social security tax. But simple on paper doesn’t always translate into simple for Congress, so we will have to wait and see how or if fixes are addressed in the years to come. The important point is that those currently retired and about to retire should see no change in expected benefits for many years to come, if at all.

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Northstar Financial Planners

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