Updated Wednesday, July 23, 2014 as of 7:58 AM ET
Blogs - The Informed Advisor
Social Security Deficit: Fact or Fiction?
Wednesday, March 26, 2014

You may have heard that the Social Security OASI (Old Age and Survivor Insurance) program is running deficits. This has been reported since 2011 and you might think the program is bleeding red ink. The truth is a bit more nuanced than these glib headlines suggest. Separating the facts from the exaggerations is confused by a number of factors including temporary tax holidays and definitions of cash flow.

Social Security is primarily (but not solely) funded by the payroll taxes which it collects on all employment income. There is a 5.3% payroll tax on the income of employees, plus 5.3% for employers. Self-employed individuals have the privilege of paying 10.6%; that is, the usual portion for both the employee and employer.

The first alarm bells of Social Security deficits were sounded in 2011. This was the year that Congress enacted a Social Security payroll tax holiday as a form of temporary economic stimulus. For both 2011 and 2012 Congress temporarily reduced the employee portion of payroll taxes from 5.3% to 3.6%. This caused a dramatic drop in program revenues and also muddied the Social Security cash flow picture. The program ran significant deficits and required federal reimbursements of $88 and $98 billion in those two years in order to backstop the lost revenues.

Starting in 2013, however, employee tax rates returned to the normal 5.3% and federal reimbursements went away. While the 2013 numbers are still not available, actuarial estimates from the 2013 Social Security Trustees Report projected that, in 2013, payroll tax and income tax receipts would total about $642 billion and projected benefit payments would total $675 billion. This difference of $33 billion is the remaining ‘cash flow’ deficit to which some people refer.

This critique, however, conveniently ignores another important income source: interest income. The Social Security OASI Trust Fund, now valued at roughly $2.7 trillion, is fully invested in US Treasury securities. The projected 2013 interest payments on this investment are approximately $98 billion. Add this into the tax receipts and the program remains snugly in the black.

Shockingly, in light of the continuing narrative of deficit spending, Social Security OASI annual financial operations is actually projected to remain in the black until 2022 based on intermediate projections by the Social Security Administration! Furthermore, the OASI Trust Fund is even expected to grow to as much as $3.0 trillion in the early 2020s.

At this point, demographics finally do kick in. The amount of benefits being paid out will outstrip both tax revenues and the interest payments. There really will be an annual deficit by any definition and the trust fund will begin to be drawn down.

There is no sugarcoating the fact that the huge baby boomer demographic will likely fully deplete the trust fund (as planned) sometime in the mid-2030s and stress the system thereafter leading to benefit reductions of approximately 25% if no changes are made. A number of workable proposals to re-balance the system have been made and seem to only require the political will to get it done.
In the meantime you can help your clients understand that while challenges exist, the Social Security system is not bleeding red ink, projects full benefits for another 20 years and most observers expect necessary adjustments to the system will be made to stabilize benefits thereafter.

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


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(6) Comments
The Social Security Trust is funded with Treasury IOU's, how reassuring as our Nation will sink deeper into its compulsive deficit spending once normal interest rates reappear in the future. Thanks to QE3 and the FED, current annual interest payments to service our $17 trillion of debt is a mere approximate $260 billion. However, the CBO projects this ANNUAL interest cost to mushroom to an estimated $860 within the next decade. Add this additional INCREMENTAL $600 BILLION of annual spending (to merely service the debt) and all other federal government social welfare spending will simply be crowded out. This result will not be politically acceptable. The result will be that you either have increased deficit spending adding to the national debt, or, you increase tax revenues to pay for the growing interest cost to service the federal governments lifetime and increasing debt. Thus, as tax demands and burdens grow, private sector growth and vitality diminishes. As GDP growth wanes, tax revenues fall and the federal government is less able to cash flow its daunting Social Security Trust IOU payments. To suggest that "Financial Hell" is coming? Would label you a Realist, hardly a Visionary.
Posted by THOMAS S | Thursday, March 27 2014 at 2:16PM ET
One solution to a gradually increasing federal deficit is to concentrate federal efforts at enhancing the ability of the private sector to increase GDP, by eliminating counter productive regulations and restrictions on private sector opportunities to grow profits, jobs, and to become more efficient. Federal tax revenues grow when corporate and individual earnings grow thus leading to enhanced tax revenues from economic growth rather than from increasing tax rates to enhance tax revenues. Federal laws need to be carefully scrutinized to identify possible negation impacts on GDP growth. New statutes as well as existing statutes and regulations need to be grades on GDP growth impact.

We don't hear much about such considerations from Congress or the Executive Branch. WHY NOT!!

Posted by Daniel B | Thursday, March 27 2014 at 7:04PM ET
I thought the social security tax rate was 6.2% + 1.45% Medicare tax=7.65%? The reduction in 2011 was 2% to a rate of 4.2%.

Anyway, the whole system should be invested in "AMERICA". Not the Federal Government. My calculations show that just putting all the Payroll taxes into Corporate bonds would make the whole system totally sustainable for generations. A measley 2% interest rate from the Government is NOT the way to invest our Retirement dollars. Just ask those Teacher and federal employee unions whose massive pensions became massive simply because they are invested in Stocks-bonds. Here in Missouri our teacher unions get over $100,000 pensions when they retire ---A far cry from the average soc sec check of $28,000 annually. It is time to change that.

Posted by Peter R | Saturday, March 29 2014 at 8:46PM ET
I thought the OASDI tax was 6.2%?
Posted by JUAN R | Friday, April 04 2014 at 8:23PM ET
Social Security is primarily funded by the payroll taxes which it collects on all employment income. There is a 5.3% payroll tax on the income of employees, plus 5.3% for employers. learn more here Self-employed individuals have the privilege of paying 10.6%
Posted by prinka s | Tuesday, April 08 2014 at 2:31PM ET
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