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Table T80.1
Operation Of the Social Security Trust Fund (SSTF) and the Social Security
Program
Operating
Operating (Cash) Net
(Cash) Net Income Income SSTF
Income (excludes (includes Assets at
Calendar (excludes interest) Interest interest) end of
Year interest) Outgo (= B - C) income ( = D + E) year
-------- --------- -------- ---------- -------- ---------- ---------
A B C D E F G
1985 201 191 10 3 13 42
1990 298 253 45 17 62 225
1994 350 323 27 31 58 436
1997 414 369 45 44 89 656
1998 440 382 58 49 107 763
1999 464 394 70 54 124 887
2000 479 409 70 59 129 1016
2001 500 427 73 65 137 1153
2002 520 448 72 72 144 1297
2003 543 471 72 79 151 1448
2004 567 496 71 88 158 1606
2005 595 524 71 97 168 1774
2006 623 555 68 107 175 1949
2007 655 588 67 118 185 2134
2008 687 625 63 130 193 2327
2009 722 666 56 144 200 2527
2010 759 710 49 158 206 2734
2011 796 758 38 172 211 2944
2012 835 810 25 188 212 3156
2013 875 867 8 203 211 3367
2014 917 929 -12 216 204 3571
2015 960 995 -35 229 194 3765
2016 1005 1067 -61 240 179 3944
2017 1052 1143 -91 251 160 4103
2018 1101 1225 -124 260 136 4239
2019 1152 1313 -161 268 107 4346
2020 1205 1405 -200 273 74 4420
2021 1260 1501 -241 277 36 4456
2022 1318 1600 -282 278 -4 4452
2023 1377 1704 -327 276 -50 4401
2024 1439 1812 -373 272 -101 4300
2025 1504 1925 -420 264 -157 4144
2026 1572 2041 -469 253 -217 3927
2027 1642 2162 -519 237 -282 3645
2028 1716 2285 -569 218 -351 3294
2029 1794 2412 -618 194 -424 2870
2030 1876 2542 -666 165 -501 2369
2031 1961 2677 -716 132 -584 1785
2032 2051 2816 -765 93 -673 1112
2033 2143 2958 -815 48 -766 346
2034 2241 3101 -860 0 -860 0
2035 2342 3247 -904 0 -904 0
2040 2921 4037 -1116 0 -1116 0
2045 3630 5001 -1372 0 -1372 0
2050 4498 6230 -1732 0 -1732 0
2055 5565 7842 -2277 0 -2277 0
2060 6886 9888 -3002 0 -3002 0
2065 8522 12413 -3891 0 -3891 0
2070 10539 15531 -4993 0 -4993 0
2075 13020 19415 -6395 0 -6395 0
To better understand the above table, let's look at 1998 from the above table, which are actual figures for calendar year 1998. I also include the 1997 closing balance for the SSTF, but I don't show the 1997 operations so as to reduce clutter.
Operating
Operating (Cash) Net
(Cash) Net Income Income SSTF
Income (excludes (includes Assets at
Calendar (excludes interest) Interest interest) end of
Year interest) Outgo (= B - C) income ( = D + E) year
-------- --------- -------- ---------- -------- ---------- ---------
A B C D E F G
1997 656
1998 440 382 58 49 107 763
It indicates that in 1998, the federal government took in 440 B$ in SS taxes and spent 382 B$ in SS benefits and administrative expenses. Thus, the federal government came out ahead by 58 B$. Unfortunately, the federal government spent the entire 58 B$ on current non-pension federal programs (such as on the military, government salaries, the national forests, etc.). Nevertheless, the federal government credited the SSTF with the 58 B$. Additionally, the federal government credited the SSTF with 49 B$ in interest payments. Thus the SSTF account increased by a total of 58 B$ + 49 B$ = 107 B$ during 1998 -- increasing from a total of 656 B$ at the end of 1997 to 763 B$ at the end of 1998.
In the remainder of this section, I will drop the "(Cash)" from "Operating (Cash)". So whenever you see "Operating", think of "Operating cash" or "real-money" or "everything except interest".
In regard to the all-important Operating Net Income, also referred to as the Operating Surplus (column D above), the situation is projected to become even more rosy for the federal government in the next few years. Operating Net Income grows from 58 B$ in 1998 to a projected 70 B$ in 1999 and 2000, and 73 B$ in 2001.
The year 2001 is high noon for Operating Net Income, when it peaks at 73 B$. (On a real dollar basis, high noon occurs in 1999). It then declines slowly to 68 B$ in 2006 and then declines rapidly to 8 B$ in 2013. 2013 is the last year when Operating Net Income is positive, that is, when SS taxes collected exceeds outgo (SS payments to beneficiaries + admin expenses).
In 2014, SS taxes collected is 12 B$ LESS than outgo. Thus, the SSTF will have to redeem 12 B$ of its bonds in order to pay all beneficiaries. (This will drain 12 B$ from general revenues). The Operating Net Income becomes increasingly negative thereafter, becoming an ever increasing drain on general revenues (and thus on the general taxpayer).
Interestingly though, SSTF assets continue to increase all the way out through 2021. That's because interest credited by the federal government to the SSTF account exceeds the deficit in Operating Net Income. The SSTF assets reach a peak of 4456 B$ in 2021.
Beginning in 2022, the operating net income deficit exceeds the interest income, so that Net Income becomes negative. So the SSTF account begins to decline. It declines until it reaches zero sometime in mid-year 2034.
Bear in mind that the SSTF account is just an account. It has no assets in it other than claims on the Treasury general fund. And the general fund can only satisfy these claims by coming up with real money somehow -- by some combination of increasing taxes, cutting other federal spending, and peddling bonds to the public. In other words, the assets in the SSTF -- the "Special Issue Treasury obligations" -- are nothing more than claims on the general taxpayer.
Some say that the SSTF has real assets -- Treasury obligations, backed by the full faith and credit of the U.S. government -- considered the most secure assets to be found anywhere. And that is true. It is also true, however, that the SSTF assets are Treasury general fund liabilities. In other words, the general fund owes the SSTF. Thus, the assets cancel the liabilities, and there is no net saving or store of value. As such, they cannot ease the burden on tomorrow's workers and taxpayers.
This is stated clearly by the Congressional Budget Office (CBO), the Congressional Research Office (CRS), the Office of Management and Budget (OMB), and a former Social Security Administration commissioner, among others. Even the SS Trustees allude to this problem in TR99 by saying that the problem of where the general fund is going to get the revenues to redeem the bonds is "not within the scope of this report" (non123). See section non122 for quotes by official government sources and section non129 for quotes by others regarding the nature of the trust funds' assets.
Too often, the whole discussion of the future health of the Social Security system has been focused on trust fund solvency. From that perspective, it looks like things are O.K all the way out to 2034 when the SSTF runs out of assets. However, the real concern begins in 2014 when the SS system begins running annual operating deficits (when benefits paid + administrative expenses exceed SS taxes collected). That is the first year when some SSTF obligations must be redeemed. Raising the cash to redeem these bonds will be a drain on the federal budget.
Before leaving the above table, it is somewhat disconcerting that the SS operating surplus (the Operating Net Income) peaks so soon -- 2001. (Even more disturbing is that on a real dollar basis it peaks in 1999). And becomes negative only 13 years later -- in 2014.
In the last few years, we've become used to an era of large SS surpluses. This happy era of large SS surpluses will continue for a few more years. The Concord Coalition characterizes this period -- when baby boomers are all working and around their peak earning years -- as a demographic Indian summer. And this demographic Indian summer will peak in 2001 (or 1999 if counting real dollars) and begin cooling down after that.
On another subject, one wonders if 2001 (or 1999) might also be a demographic high noon for the U.S. stock market. Most analysts agree that favorable demographics (a large workforce, with the baby boomer contingent entering -- or well into -- their serious savings years) is a (and many say the) major force behind the 1990's bull market. (The 1980's bull market is explained mostly by major reductions in interest rates and inflation rates, and a much - improved economic picture (for corporations anyway) compared to the 1970's. And to a lesser extent some boomers entering their savings years).
In just the 20 year period from Jan 1, 2014 to Jan 1, 2034, the federal government will be paying out 7463 B$ more in Social Security benefits and administrative expenses than it will be collecting in Social Security taxes, according to the Trustees' Intermediate projections. (7463 B$ is the sum of the Operating (Cash) Net Income column from 2014 through 2033 inclusive in Table T80.1 in section non80). From Jan 1, 2014 to mid 2034 when the SSTF "assets" are exhausted, a total of 7809 B$ more will be paid out in SS benefits and administrative expenses than will be collected in SS taxes. (The balance in the SSTF on Jan 1, 2014 will be 346 B$. 7463 + 346 = 7809).
The Special Issue Treasury obligations in the SSTF will not help the federal goverment to meet these payments, because they are nothing more than claims of one account of the Treasury on another account. The SSTF could be stuffed with a massive mountain of trillion dollar government bonds, and it would not help the federal government one iota in paying Social Security beneficiaries. For when it comes time for the federal government to pay beneficiaries, and taxes collected are not sufficient, it does no good for it to redeem some of the bonds in the SSTF. Because, where will the federal government get the real money to redeem the bonds? From itself? But it has no money. The federal government is deeply in debt. It can only get the money by raising taxes, cutting other spending, or selling bonds to the public -- the same as it would raise money if there were no trust fund.
Someone suggested that the federal government can get the "real money" to pay the beneficiaries easily enough by just printing the money. But increasing the money supply without increasing the supply of goods and services in the economy is the classical recipe for inflation -- as there is then more money chasing the same number of goods and services.
The foregoing should make clear that Social Security is not a retirement savings plan that we've been contributing to. Rather, SS is a pay-as-you-go program that has been used to pay current beneficiaries and reduce current general taxes (mostly income taxes). Since nothing has been saved, there is not a pile of money or "funds" or any other assets that can be, for example, invested in the stock market.
The following section discusses in more detail the persistent ideology that we are entitled to benefits because we have been "saving for retirement" by paying Social Security and Medicare payroll taxes. After that, the supposedly poor returns that Social Security has been earning is discussed. That leads to a discussion of ideas to increase the returns by privatization and/or investing some Social Security tax revenues in the stock market.
A lot of people think that what they have been paying into the system as Social Security (SS) payroll taxes is being saved into the Social Security Trust Fund for their retirement. And no wonder, as that is what the media and government officials have been telling them for decades.
One often hears the attitude expressed by retirees or near - retirees that maybe SS and Medicare benefits need to be cut for the next generation, but don't cut my benefits, because I've been paying into the system for 30 or 40 years, and so I'm entitled. But in fact, the SS system has been funded entirely on a pay - as - you - go basis, with current payroll taxes being spent on two things: {1} benefits for the current elderly generation and disabled people, and {2} on current general federal programs. None has been saved for anyone's future. There is nothing in the trust funds except Special Issue Treasury obligations that represent government promises to pay benefits to the elderly in the future.
The spending of the SS revenue surpluses on current general federal programs resulted in lower income tax rates than would have been needed had there not been the SS surpluses -- given that everything else, such as spending and borrowing and deficits, were kept the same. Thus, the SS surplus revenues paid for lower income taxes. Or, if you want to argue that income taxes would not have been different, than the SS surpluses paid for more current general federal spending or less debt than would have been the case without the SS surpluses.
So, to put it bluntly, all SS taxes that people paid in the past went to taking care of their elders, and on current federal programs and/or lower income taxes. Nothing was saved for the future.
Each generation is obliged to take care of its elders, and so far all generations have done so, including the generations in retirement or nearing retirement. They have done their job, and they deserve to be taken care of too. But that does NOT automatically entitle them to what they paid in plus interest. Again, because what they paid in was spent on their elders and on current federal programs, rather than being saved for their own retirement.
Here's a comment from the book Gray Dawn, p. 11 about how our "right of entitlement" has been growing:
[Begin Gray Dawn quote: ] In Europe, the public can hardly imagine that the promises made by previous generations of politicians can no longer be kept. They therefore support leaders, unions, and party coalitions that make generous unfunded pensions the very cornerstone of social democracy.
In the U.S., the problem is not so much a habit of welfare - state dependence as the peculiar American notion that every citizen has personally earned and therefore is "entitled" to whatever benefits government happens to have promised. Over the past fifty years, as this notion of "earned benefits" has expanded, America's personal savings rate has fallen from near the top to the very bottom among developed nations. From a society that once felt obliged to endow future generations, we have become a society that feels entitled to support from our children. [End Gray Dawn quote ]
Or even worse is the notion that we have been paying "premiums" into a "social insurance" program. And now that the disastrous event for which we have been been buying protection from for all of these years -- namely that we've grown old -- has occured, we now feel entitled to collect benefits all out of proportion to the "premiums" we have been paying.
Also, one can see from Table T70.1 repeated below (see section non70 for details) that generations who worked primarily before 1980 paid much lower rates than those working primarily since 1980. (1980 is just an arbitrary date for discussion purposes, as payroll taxes have been rising at a fairly steady rate ever since the programs began -- see section non70 for the full details). So from the standpoint of fairness, it doesn't seem like the current elderly are entitled to big payouts at the expense of generations in the future. Remembering too that Generations X and Y will, per the Trustees' Intermediate forecasts, be shouldering double today's tax burden in order to pay for the boomers' retirement.
==============================================
FROM Table T70.1 in section non70
Social Security and Medicare Part A Contribution Rates (in percent),
1940, 1950, 1960, 1970, 1980, 1990, 1999
(The Contribution Rates are much more commonly called the
Payroll Tax Rates), OASDI = Social Security.
HI = Medicare, Part A OASDIHI = OASDI + HI
Employee + Employer |
OASDI Combined | Self-Employed
Calen- Contri- ---------------------- | ----------------------
dar bution OASDI HI OASDIHI | OASDI HI OASDIHI
Years Base,$ % % % | % % %
------ ------ ----- ------ ------- | ------ ------ -------
1940 3,000 2.000 - 2.000 | - - -
1950 3,600 3.000 - 3.000 | - - -
1960 4,800 6.000 - 6.000 | 4.500 - 4.500
1970 7,800 8.400 1.200 9.600 | 6.300 0.600 6.900
1980 25,900 10.160 2.100 12.260 | 7.050 1.050 8.100
1990 51,300 12.400 2.900 15.300 | 12.400 2.900 15.300
1999 72,600 12.400 2.900 15.300 | 12.400 2.900 15.300
Related to our overblown sense of entitlement, see also "Federal Taxes Are Too High, But Don't Cut My Social Security and Medicare" in section non150. This section points out that 75% of the federal budget is for just a few items that most consider sacred -- like Social Security, Medicare, defense, veterans pensions and benefits, federal employee pensions, Supplemental Security Income (SSI), and interest on the publicly-held national debt. (For those on the left who consider defense spending to be greatly excessive, I'm sure I could find at least as much in other federal programs that they would consider sacred). And this "sacred" percentage is expected to grow in the future as the elderly entitlements grow.
Most people don't seem to realize that most of the federal budget is a big transfer program for what are called "middle-class entitlements", such as Social Security and Medicare. And that there just isn't that much left to cut in the federal budget that will make much of a difference to the amount of taxes that are needed -- unless we are willing to cut the middle-class entitlements.
(hits since Sept 16, 1999)
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