The Government Which Put Social Security At Risk Wants Recipients To Bail It Out
You’ve likely heard the latest annual estimates: the main trust fund for Social Security—the Old-Age and Survivors Insurance (OASI)—has until 2034 until it runs dry. The other trust fund for disability payments—Disability Insurance (DI)—would be depleted by 2052 at current rates. If that money was used to cover OASI shortcomings, it would only add a year and then, in 2035, all the money would be gone.
Medicare is in even poorer shape. It also has two funds: The Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds. At current rates, the HI fund will be depleted by 2026. The SMI fund seems fine for the time being.
These dates could be worse—were worse last year—but they should be scary. We have a segment of the population growing older, which will retire or, at least, expect retirement benefits even if they can’t afford to stop working. Medical issues will increase. Many millions of people have paid all their lives into these systems and expect to collect.
Unfortunately, most aren’t educated to how these programs work. Both systems are pay-as-you-go, which means that, from day one, the taxes paid into Social Security and Medicare went to cover those who were already in the programs. Money left over would go into the trust funds. There was no general mechanism to pay now for the future. None of this was like a traditional pension fund or even a 401(k).
The trust funds also weren’t exactly that. They were really accounting entries to track money. The government has borrowed trillions from them in return for special Treasury bonds. This isn’t insane or unusual, by the way. U.S. bonds have been considered the safest possible investments in the world, and probably have been the only financial instrument that was safe enough. Putting money into the stock market to grow the fund might seem a good idea to many, but the problem is the size of the moneys involved. The idea of the U.S. investing trillions into stocks, only to rebalance and change the portfolio would create giant waves and massive instability.
The U.S. will continue to make interest payments to the various trust funds, but the whole system needs more money. Congress goes back and forth on combinations of additional payroll taxes, cutting benefit growth, possibly changing eligibility dates, or some mix of it all. But it seems likely that regular folk will feel the pinch, one way or another. We will all have to sacrifice under such a regimen.
However, one obvious problem is the 2017 tax cuts. Most people don’t seem to feel a benefit, although corporations are doing well by it. Many of the biggest tax avoidance tools were left in place while statutory rates—typically significantly more than the effective rates companies pay after deductions—were dropped from 35% to 21%. Even as corporate income tax payments drop for companies, they’ve hit new heights for individuals, so many have less money to put toward retirement.
Another result is the growing deficit. At the six-month mark in the federal October through September fiscal year, the overrun was at a pace 27% higher than the government projections. If it continues, and there’s no data suggesting that it might suddenly turn about, the deficit this year will hit $1.4 trillion, far ahead of the predicted $1.09 trillion.
The Trump administration has projected growing deficits through 2022 and then ones that would generally fall. But if deficits already grow significantly faster than projected and, if economists are right, the growing economy that was supposed to bring in more tax revenue will likely fall, the general budget pressure will grow far more than the administration thinks. There will be less, not more, money available in general. Add in the likelihood of growing interest payments (currently close to $900 million every day) as we leave the era of ultra-low rates behind — one expert I spoke with guessed that interest on the debt would double within a few years — things are going to become unsupportable.
The biggest area of weakness is corporate taxes and some of the cuts badly need to be reversed. The U.S. could keep a lower rate and still increase tax revenue, helping to keep everything in a more stable status.