Will we earn security in retirement?

Every year the trustees of the Social Secu­rity Sys­tem — offi­cially known as the Old-Age and Sur­vivors Insur­ance and the Dis­abil­ity Insur­ance trust funds or the OASI/DI trust funds — pro­vide their most recent esti­mates of the sol­vency of Social Secu­rity. Start­ing back in the mid-1980s, Social Secu­rity began col­lect­ing more in annual pay­ments from cur­rent work­ers than was paid out to retirees, pro­duc­ing a favor­able bal­ance in the Social Secu­rity Trust Fund, amount­ing to nearly $2.7 tril­lion in assets as of Dec. 31 of last year. At this very basic level, it may seem as though all is well.

Unfor­tu­nately, eco­nomic and demo­graphic influ­ences have taken a toll on the Social Secu­rity (SS) Sys­tem that is masked by this cur­sory view of the SS trust fund. Over the past two cal­en­dar years, the dol­lars col­lected from cur­rent work­ers (along with Gen­eral Fund trans­fers to make up for the 2 per­cent­age point reduc­tion in the pay­roll tax rate paid by impacted work­ers) has been insuf­fi­cient to cover expen­di­tures asso­ci­ated with retirees plus the costs of admin­is­ter­ing the pro­gram. Put dif­fer­ently, on an annual oper­a­tional basis, the SS sys­tem is run­ning a deficit. In 2010, the oper­a­tional deficit amounted to $45.5 bil­lion, which nearly dou­bled to $90.9 bil­lion in 2011.

Of course, those trust fund dol­lars of about $2.7 tril­lion are “invested” and thus pro­vide an “inter­est income” fig­ure that allows the sys­tem to remain sol­vent through 2033. At that time (if pro­jec­tions prove cor­rect), the assets of the com­bined trust funds will be depleted and income from cur­rent work­ers will only be able to cover some­where around 75 per­cent of oblig­a­tions to retirees.

So, doesn’t that mean politi­cians have a good 20 years to avoid mak­ing deci­sions that will impact Amer­i­cans in a sub­stan­tive way? Sadly, no, the impact is already being felt and will become more appar­ent as time progresses.

It is vitally impor­tant to rec­og­nize the assets in which the sys­tem is per­mit­ted to “invest” those excess funds. By law, any monies taken in by Social Secu­rity not needed for cur­rent expen­di­tures are used to pur­chase non-marketable Trea­sury Secu­ri­ties (with the excess funds bor­rowed by the U.S. Trea­sury used for other cur­rent spend­ing). The Trea­sury secu­ri­ties are “non-marketable” in that the only entity that can repur­chase these SS assets is the U.S. Treasury.

This is a mat­ter of tremen­dous impor­tance. Should the U.S. gov­ern­ment reach its leg­is­lated debt limit, the trust fund assets can­not be “cashed in.” As such, should an impasse in bud­get nego­ti­a­tions be reached — as was the case for a time last sum­mer — it is con­ceiv­able that Social Secu­rity pay­ments might be dis­rupted. That is why some ana­lysts con­sider trust fund bal­ances to be largely irrel­e­vant to the oper­a­tional SS bud­get, since the only way to pay for annual oper­a­tional deficits is for the gov­ern­ment to bor­row more funds so that cur­rently oblig­a­tions can be met.

At best, for the fore­see­able future, this gov­ern­ment bor­row­ing places upward pres­sure on inter­est rates, thus cut­ting off some pri­vate sec­tor spend­ing. At worst, with the cur­rent debt limit likely to be reached either late this year or very early next year, the next bud­getary apoc­a­lypse could unfold shortly after the Novem­ber pres­i­den­tial election.

Beyond the liq­uid­ity of the trust fund assets, both eco­nomic and demo­graphic influ­ences may ren­der the lat­est SS pro­jec­tions too opti­mistic. Accord­ing to the most recent fore­casts, the U.S. econ­omy will post an expected aver­age GDP growth rate of 3.1 per­cent between 2013 and 2020. While this is con­ceiv­able, the prior eight years saw real eco­nomic growth aver­ag­ing just 1.4 per­cent. So, should growth fall short of pro­jec­tions, job and income advances will suf­fer and SS tax col­lec­tions will be shy of expec­ta­tions. As well, with large num­bers of baby boomers start­ing to reach retire­ment, any lack of jobs may force some into early retire­ment and cause the tim­ing of some SS expen­di­tures to be accelerated.

As the Social Secu­rity Sys­tem presents pol­i­cy­mak­ers a vir­tual night­mare sce­nario, pri­vate efforts to aug­ment retire­ment income are also lag­ging. Accord­ing to a recent sur­vey, 49 per­cent of house­holds indi­cate they are not con­tribut­ing to any type of retire­ment plan, such as 401(k), 403(b), or indi­vid­ual retire­ment accounts. No doubt, the deplorable state of the econ­omy explains much of this inac­tion. Taken together with the sol­vency issues related to Social Secu­rity, the lack of pri­vate sav­ings efforts sug­gests a com­fort­able retire­ment may become a dream for an increas­ing num­ber of older Americans.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on May 15 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.