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“Is that all it needs……………?” July 28, 2015

Posted by forwardfinancialplanning1 in Social Security.

We continuously read articles predicting the imminent demise of Social Security and lamenting Congress’ lack of action in addressing its shortfalls.  Read an article on the Fox Business website which (if accurate) puts the problem into a much clearer perspective.  Note also, that the following relates only to the Old Age and Survivors’ portion of the Social Security system, and not its Disability component.

The Trustees report noted that the program has an actuarial deficit of 2.68% of taxable payroll.  Due to this shortfall, the fund is paying out more in benefits than it is taking in from current workers.  It obtains these needed dollars from paying out some of the interest it is earning on its many years of accumulated surplus.  By law, this surplus has been invested in US Treasury debt which of course, pays (albeit, low) interest to the Trust Fund.  The Trustees are forecasting that by 2034, the on-going shortfall will consume all of the interest in addition to the principal of the Treasury bonds.  At that point, the program will only be able to pay about 75% of its promised benefits since it will merely be redirecting current in-flows back out in the form of benefit payments. (If that sounds to you like a Ponzi scheme, you are correct).

But what does this “2.68% of payroll actuarial deficit” really mean??  According to the article, it suggests that if an additional 2.68% was coming into the fund, it would not be drained for at least 75 more years.  Since both the employee and the employer are currently assessed 6.2% of payroll for Social Security, an increase of 1.34% on the tab for each party would fix the problem.

I’d be willing to bet that if you told the typical US citizen that they could remedy Social Security’s problems by coughing up an additional 1.34% of their pay, they’d be looking for a place to “sign on.”  Employers may object because of the collective aggregate increase in their payroll costs, but they would most likely adjust their overall cost structure to preserve this pillar of US retirement security.

Now, if we can only give the Trustees the right to invest elsewhere than in low yielding US Treasury debt, we may really fix this mess!!!



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