Updated Thursday, July 10, 2014 as of 12:50 PM ET
Blogs - The Informed Advisor
Social Security: Common Myths & Hard Facts
Wednesday, December 4, 2013

Social Security benefits represent the largest asset for many mass-affluent clients, according to a Society of Actuary study titled “The Impact of Running Out of Money In Retirement.” One way that financial planners can help clients manage this important asset is to make sure they understand how the system works and not get swayed by political posturing, media hype or popular myth.

The amount of misinformation and outright distortion about the workings of Social Security is stunning. In 2000, Al Gore campaigned to create a “lockbox” to supposedly protect the program assets. In 2012, Rick Perry called SS a Ponzi scheme. There are regular rants from political leaders about the trust fund having nothing but IOUs, or being broke, or how the federal government is raiding it. Some hard facts are in order.

The SS trust fund is the basic account through which the entire program is administered. Throughout the 1960s and 70s the trust fund was not a hot topic, expenses closely tracked income and the trust fund balance hovered from $20 million to $35 million. With an eye toward the huge baby boomer generation retiring in the early 21st century, landmark 1983 legislation shored up the system by raising taxes, boosting inflows and setting the stage to dramatically grow the trust fund. Today that trust fund has over $2.5 trillion in assets.

Like any manager of a large fund, the SS Administration would be foolish to leave the assets idle since inflation would eat up a significant portion of the value. Congress decided that the program could use only one investment option, U.S. Treasury Securities which, last I checked, were still considered one of the safest, lowest-risk investments in the world. In fiscal 2012, the trust fund investments in US Treasury securities paid over 4% interest and generated over $100 billion in interest. So yes, the trust fund is full of IOUs. They are called bonds, and are generally considered a prudent investment.

A more recent SS scare was that just this last year the system was running out of money. What was really happening was that for the first time yearly benefit payments exceeded yearly income from payroll taxes. What was not commonly understood was that total system income was still exceeding expenses. In fact, in fiscal 2012, although benefit payments exceeded tax payments by over $130 million the trust fund balance still grew by $94 million once income from interest, tax receipts and other sources was included.

Another significant source of confusion is the blurring of the different debates about federal budgets and debt and the SS system. Social Security does not contribute to the federal debt. The SS system is in the black. If it runs low on money it cannot borrow, it would have to pay out less in order to balance its books.

The federal government, on the other hand, runs huge annual deficits and has now accumulated over $14 trillion in debt. It needs to constantly borrow money to fund operations. Whether the money is borrowed from Chinese investors, US hedge funds, your grandfather or the SS system is irrelevant. Is this a problem? Sure, but not for the SS system.

Going forward the SS system does have a problem. The trust fund was built up to be spent for the baby boomer demographic bulge. It is projected to be depleted by the mid-2030s. At that time future tax receipts are expected to pay out about 72% of promised benefits. Since the SS system cannot borrow money either the system will be changed or the lower benefits paid out.

Numerous fixes are being considered to fill the future gap including slowly ratcheting up the benefit eligibility age, changing the benefit formula and raising the cap on income subject to SS tax. Projections suggest that the fixes would not need to be severe to bring the program back into balance but will be more a matter of political will to tackle a headline government program.

What clients in their sixties and late fifties need to understand is that the system continues to work as planned, full benefits are solid for the next 20 years without any legislation, nobody has raided the pantry and some changes will likely need to be made to shore up post-2032 benefits.

Paul Norr is a financial planner in Thousand Oaks, Calif., and writes about money and planning. His website is www.paulnorr.com

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(7) Comments
My opinion - Thank you Paul for your comments and I agree we need to ignore the hype. But your research still shows the true problem. In 2030, The Trust Fund will be exhausted and Social Security Tax revenues will only cover 72% of the required benefit payments. Unless benefits are reduced or taxes increased, the Federal government will need to make up the shortfall annually. This expected payment will be huge and a major expense of the Federal Government. Either overall income taxes will need to be raised or overall spending reduced to create a more balanced budget. Further, between now and then as the Trust Fund is being tapped, it is the Federal government that needs to pay back the principal. My understanding is that this money will also need to be borrowed to finance it. This further exacerbates the Federal debt problem. I agree with you, the problem is not Social Security, the problem is that we already have a significant debt and deficit problem. If we had been running surpluses and were the number one creditor nation in the world, we could manager this better. But we are not. Thus, the pressure this put on our national debt and needed income tax revenues is staggering. We do have time to solve most of this issue through minor changes, but this is a change in the social contract under which the SS taxes were collected.
Posted by Bill S | Thursday, December 05 2013 at 3:56PM ET
I disagree with the statement "Social Security does not contribute to the federal debt" as it will if nothing changes. As mentioned, the fund has $2.5t in treasuries that will be depleted by 2030. As Bill mentioned, those funds will need to be borrowed in order to make principal payments. So indirectly, the SS fund will add 2.5 trillion in Federal debt by mid 2030 unless rev/expenses change by then. Not a huge number relative to the projected debt by then but still worth noting.
Posted by tim c | Thursday, December 05 2013 at 4:16PM ET
I am very aware of all of all of the rulings; 2 Supreme decisions, the 1983 changes, etc. So here is the question no one seems to be able to answer, "since Social security is a tax on income, why do we pay taxes on all of the benefits we receive at ages 65-67?

Gary A.

Posted by Gary A | Thursday, December 05 2013 at 5:21PM ET
All of our "posturing" and words will do no good at all until those words are "hailed upon" our idiot congressional reps and Senators. So, stop beating up each other and start beating down the doors of those you and I have elected. Don't like the taxes on paid SS benefits, get the Dem's to change the law they passed. Don't want to lose your current level of benefit, get more people to contribute which means more people at work and less people on the "dole". Want "more" money paid into the system, why not take off the top end on earnings cap? We continuously "beat up" on our Congressman, and two senators. Once a month, we send letters, e-mails, and make phone calls. Sooner, or later, we hope to get these folks to understand our concerns as Financial Advisors, and what this means to our clientele...
Posted by L. R | Friday, December 06 2013 at 4:31PM ET
The SS Trust Fund is merely an accounting entity. When the gov't monetizes these funds buy purchasing treasuries, it is in effect entering the Ponzi phase as described by Hyman Minsky. Misuse of these funds to offset unrelated discretionary spending will lead to a crisis larger than the one we are still muddling through.
Posted by Anthony F | Saturday, December 07 2013 at 6:25PM ET
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