Source: Social Security Administration.
If you've heard of the Social Security trust fund at all, it's
probably because you read somewhere that it's going to run out of money
soon, threatening our future Social Security benefit checks. There's a
lot more to the trust fund than that, though, and the news isn't all
bad, either.
Here are some key things to know about the Social Security trust fund:
There are actually two funds. There is the Old-Age
and Survivors Insurance, or OASI, Trust Fund, which dates back to 1937,
and the Disability Insurance, or DI, Trust Fund, started in 1957, and
both are managed by the Department of the Treasury.
They have two key purposes. The Social Security Administration explains:
(1) [T]hey provide an accounting mechanism for tracking all income to
and disbursements from the trust funds, and (2) they hold the
accumulated assets. These accumulated assets provide automatic spending
authority to pay benefits. The Social Security Act limits trust fund
expenditures to benefits and administrative costs.
The
funding process, as illustrated by Fool contributor Chuck Saletta: (1)
You and your employer paid Social Security taxes. (2) Social Security
paid its benefits out of the taxes received. (3) The surplus Social
Security tax receipts were loaned to the U.S. Treasury. (4) The U.S.
Treasury gave Social Security bonds in return for that loan. (5) The
U.S. Treasury paid Social Security interest on those bonds.
They're invested in "special" securities. Trust fund
assets used to be invested in the same Treasury securities that you or I
could buy, but that's no longer the case. Now they're invested in
"special issues" from the Treasury, which are always redeemable at face
value. That's not so with general marketable Treasury securities, as
those will see their values fluctuate along with prevailing interest
rates if they're sold before their maturity date. The average nominal
interest rate for special issues in 2014 was 2.271%, and in January 2015
it was 2.125%. Note that since Treasury securities are backed by the
U.S. government, they're considered about as safe as they can be.
The trust funds have run a surplus for a long time.
Between taxes taken in and interest earned on them, and fewer benefit
checks written, the trust funds have been running a surplus in every
year since 1984.
The Social Security trust funds are indeed headed toward insolvency.
Those surpluses that began in 1984 are likely to stop in 2020, at which
point the Social Security system can rely on incoming interest payments
to make up the deficit -- for a while. According to several government
estimates, the funds are likely to become insolvent between 2033 and
2037 -- as early as 18 years from now -- if no changes are made. The
reason behind the change is this: whereas there were about 2.8 workers
paying into the Social Security system for each recipient in 2013, it's
projected that by 2035, there will be just 2.1 workers per beneficiary.
Social Security is a network where one generation helps support another. (Image: Pixabay)
If the Social Security funds run dry, benefit checks won't necessarily stop being issued. If the solvency of the Social Security coffers fails at some point, it won't mean that there's no more money for benefits. It
will
mean that the fund is no longer taking in enough money to cover all
promised benefits. Thus, payment checks are likely to end up shrinking
-- by about 25%, according to the Social Security Administration. Thus,
even this worst-case scenario isn't utter catastrophe -- though, given
that the recent average monthly retiree benefit of $1,328 for
individuals and $2,176 for retired couples aren't huge sums, a 25% hit
will be quite meaningful, reducing the annual payout for individuals
from $15,936 to around $11,952 and for couples from $26,112 to around
$19,584.
Trust fund solvency can be restored. The funds'
current worrisome trajectory isn't unchangeable, and the system can be
shored up in numerous ways. Better still, many people
want the
system shored up, so that's a reasonably likely eventuality. Some of
many shoring-up strategies that are being floated around include
removing the Social Security income taxation cap, so that all of each
earner's income is taxed for Social Security, increasing the current
tax, raising the full retirement age at which retirees are scheduled to
start collecting benefits, and changing the formula for the
cost-of-living adjustments made annually to benefit checks. It remains
to be seen which strategy or strategies will be employed.
The bottom line for the Social Security trust funds is that they're
on shaky ground, but it's not so shaky that it can't be fixed. It's
likely that future retirees will continue to collect benefits, though
there's a chance they may be smaller. Our best defense, therefore, is to
be sure we save and invest money for retirement on our own, not relying
too much on Social Security.
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