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.