With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund’s annual surplus is forecast to all but vanish next year — nearly a decade ahead of schedule — and deprive the government of billions of dollars it had been counting on to help balance the nation’s books.
While the new numbers will not affect payments to current Social Security recipients, experts say, the disappearing surplus could have considerable implications for the government’s already grim financial situation.
Social Security taxes have long brought in more receipts than the amount paid out in Social Security benefits. Analysts predicted this to be the case until 2017, but apparently now the CBO says that the economic downturn means that by 2010 Social Security distributions will exceed tax receipts.
When there is a surplus in Social Security receipts, as there has been for years, the excess is “invested” in the Social Security Trust Fund. This Trust Fund is something of a misnomer. There is no pile of money, no investments, nothing but a pile of IOUs. By law, the Trust Fund is used to buy a special class of government bond which pays 5.5%. In other words, the surplus tax receipts that exist to pay off future benefits are given to the General Budget and spent in the current budget year, for which the Trust Fund gets a government IOU.
That’s probably confusing, so let me use an analogy:
Imagine that my wife and I both work and we both keep separate checking accounts. Every year she puts aside 12.4% of her paycheck for her retirement savings. That savings she invests with me, for which I give her a IOU entitling her to her principle plus 5.5% compounded annual interest. We’ll call that pile of IOUs her Retirement Fund. So far this sounds like a good plan.
Unfortunately, rather than invest her Retirement Fund in some tangible asset, I spend it. Every single dollar. In fact, I’m spending all of my salary, her entire Retirement Fund, and on top of that I’m running up a huge credit card bill. But so far, life is good. I’m bringing in enough income to meet all my monthly minimum payments, plus, with all that borrowing, in addition to the extra income from my wife, I’m living pretty well.
My wife’s plan was to start working part time in 2017. She was gradually going to cut back on her hours and begin to draw down some of that money she had set aside in her Retirement Fund. Occasionally, I would stop to contemplate that by 2017 I might have a problem, but hey, that’s years from now.
But, oh no, my wife’s business got hit by the bad economy. I just learned that starting next year–not in 2017–she is going to be working less and will start taking payment from me on some of those Retirement Fund IOUs I’ve been issuing her all these years. Clearly, I have a problem. I’m going to lose not just some of my wife’s income, I’m also going to have to start paying back some of those IOUs. My options are some combination of either making more money, running up even greater credit card bills, cutting back on my spending, or defaulting on payments to my wife. None of them are things I want to do.
Now you understand how the Social Security Trust Fund works. It is a Ponzi Scheme and it is going to collapse. It always was going to collapse, but it’s collapse was going to be so far in the future that we didn’t have to think about it. That future is now.