It is easy to get frustrated with the discussion of Social Security, in part because the same sliver of data is used to support completely opposing arguments.
To illustrate, most articles about Social Security mention "the shortfall" at some point. While all those pieces reference the same concept, that information in some cases may say that all is well; in other cases, it suggests that bankruptcy is imminent.
The "shortfall" represents the amount of money that we need to invest today so that the Social Security program can fulfill its promises over some period of time. In the 2017 report, the trustees concluded that we needed to add roughly 12.5 trillion dollars to the Trust Fund back on December 31, 2016.
Running short of money, but not out
That sum is a huge number if we had to invest it all at once. The fact is that we don't. That number doesn't reflect that our economy and wages are growing; hence, you will see the same number expressed in more than one way.
To help us understand the "shortfall", the trustees frame that really big number in ways that are more meaningful to the voter.
They translate the $12.5 trillion into a higher "percent of taxable payroll" because that is how much we would have to pay.
They express that sum as an "immediate and permanent reductions of benefits" because that is what we might lose.
These statistics are supposed to help you understand how stabilizing the program over the long-term might affect you, the individual. In other words, to cover the $12.5 trillion shortfall, average workers would pay an additional $1,300 in taxes this year (and rising over time). Alternatively, the average retiree would receive $2,000 less in benefits over the year, with reductions increasing over time.
Not all benchmarks are created equal
For most people, this type of information is lost in the noise. To illustrate the noise, pundits and experts also explain what $12.5 trillion means in terms of gross domestic product (GDP), or what we as a nation produce. This measure is largely ineffectual because GDP includes trillions of dollars that fall beyond the reach of the program under current law.
The nation does not pay Social Security by GDP. Today, Social Security has three main income sources: payroll taxes, general fund subsidies, and interest. In the latest report, the trustees projected that the system in 2017 would draw nearly $85 billion from interest and another $35.5 billion is expected from the taxation of benefits. This revenue is more about the past than the present.
Mixing revenue across years
For my generation, the cost of Social Security was fully covered by the payroll tax. There was even enough money that we were able to set aside some of that revenue in the Trust Fund for the time when we retire.
Today, benefit expenses require every penny of payroll taxes. There is nothing left over. In fact, we are currently drawing in resources from the Trust Fund to pay the bills. This money was earned in the past and will likely be repaid with tax revenue from the future in the form of bonds issued to the public. The one place that the money does not come from is "what we as a nation produce today."
Not all Dollars are created equal
Interest is the paycheck for money sent to work. Just as your employer gives you a wage for work, the Social Security surplus earns a salary called "interest" that goes to support the program. In 2016, that paycheck was nearly $90 billion. That means that the Trust Fund generates as much revenue as nearly 25 million farmhands.
This revenue source is a lot better than farmhands, though. Every additional dollar of payroll taxes going into the program creates some extra dollars paid out in future costs. In other words, interest earnings are generally free cash flow; whereas payroll taxes generally kick the can down the road.
Runs versus touchdowns
It is true that the Social Security shortfall represents about one percent of our growing economy, but that expresses the problem in terms that do not solve it. This benchmark is not much different from a baseball manager telling his team that they are only down a touchdown when they are trailing by seven runs. One percent of our GDP is not the price tag to fix Social Security – it is an imprecise measure of the cost to bail out the system with dollars that the system currently can't touch.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.
Originally Posted at: https://www.moneytips.com/social-security-solvent-or-bankrupt/264