Social Security: It’s All About the Cash  

We can confidently predict one thing about the future. Our politicians will be talking about Social Security.

They’ll be talking about it every year.

They will do nothing until absolutely necessary.

In the conventional wisdom that would be 2034. That’s the year that the current Social Security Trustees report   predicts the Social Security trust fund will be exhausted. When that happens, Social Security will need to cut benefits to live within its actual cash revenues. Alternatively, Congress will have to agree to appropriate the money required to provide the promised benefits.

Since they won’t have the money, they will do what they usually do.

They will borrow it.  (This, as you will soon see, is important.)

Will Congress act before then? I think so.

Congress will be forced to act

They will be forced to act, tragically loosing years of drama and attention seeking opportunities.

As a practical matter, however, very little will change.

How can that be?

Simple. Congress is already borrowing to make good on benefit promises. Social Security is cash short now. Indeed, on a cash basis the program has been cash short every year since 2009.

Cash vs. trust accounting

Yes, I know that’s hard to believe. The most recent trustees’ report itself shows an excess of costs over revenue of only $22.1 billion.

But the actual cash shortfall of Social Security is larger.

How could that be? Trust fund accounting is different from cash accounting.  By the trust accounting method that the trustees use, 2022 includes $66.4 billion in interest on bonds held by the Social Security trust fund, credited from the Treasury.

That’s a bookkeeping entry. It is not cash income.

But benefits are paid in cash that retirees can spend.

Where the cash comes from

To provide the cash, the Treasury had to borrow money from the public. So, the real cash deficit is $88.5 billion.

You can understand this with a quick lesson in Social Security finance.

The program is funded by our employment taxes. They are collected, along with some taxes on benefits. That’s the dedicated cash flow of the program. That money is used to pay benefits. Any surplus has gone to the Treasury. The Treasury, in turn, gives the trust fund special bonds that are the assets in the trust.

Spending the cash surplus

The actual cash surplus, which lasted from the early 1980s to 2009, was available to be spent elsewhere. This was a great deal for politicians. It was enough for Bill Clinton, a Democrat, to erroneously claim that the federal budget was balanced. Strangely, few noticed that total federal debt rose in spite of his declaration of a balanced budget.

And, lest you think Democrats are the source of all misrepresentations, the same Social Security surplus helped George W. Bush, a Republican, sell a tax cut, further increasing total federal debt.

That was then, this is now

But those years of cash surplus ended after 2009.

When the program is measured by cash-in versus cash-out to pay benefits, the program was a gigantic cash cow for decades.

But now it isn’t. Worse, its cash shortfall is increasing. It will reach an estimated $407.7 billion by 2032. (See table below.)

In the bookkeeping entries of trust accounting, everything looks fine until the trust fund is exhausted. Today, the Social Security Trustees’ intermediate projection is that the trust fund will be down to about $715.8 billion by 2032. It will be broke by 2034.

But sustaining benefits is about cash accounting. It’s showing a growing shortfall.

The Tooth Fairy arrived years ago

Ironically, this isn’t all bad news.

Our government is already borrowing money from public sources to pay benefits. Whether the trust fund exists or not, some of the cash necessary to pay the costs of the program has been borrowed in every year since 2009.

There is only one difference between what will happen in any year before the trust fund is emptied and the years after it is empty. While the trust fund exists, the Treasury will be redeeming the bonds it gave Social Security. It will redeem them by borrowing the money. It will raise the cash by issuing new Treasury bonds to the public.

Enter Congress

But when the trust fund is broke, Congress will have to appropriate the money before the Treasury can borrow it.

In cash results, there is no difference. A dollar borrowed is a dollar borrowed.

The difference is entirely political.

A wise, earlier Congress made the financing of Social Security separate from the finances of other government operations. They did this to protect the program from, well, politicians. The ongoing deficit means that Congress, a group Mark Twain called the “only distinctly American criminal class,” will have something to say about providing the money.

Starting with basics

My suggestion: The first rule for the next reform of Social Security must be: Don’t give Congress an extra dime. Make Social Security a true “pay as you go” program.

P.S. Just so you know, the lower cost projections from the trustees are far more positive, albeit in the very dark way. They have the trust fund lasting until 2065. Better still, we can achieve that without an act of Congress.

All we need to do is have every American give up about four years of life expectancy. Some would say we’re working pretty hard on that.

Related columns:

Scott Burns, “Social Security: It’s Still in the Woods,” 8/2/2015  https://scottburns.com/social-security-its-still-in-the-woods/

Scott Burns, “More Social Security, Not Less?,” 12/13/2015  https://scottburns.com/more-social-security-not-less/

Scott Burns, “Choose: Money or Life?,” 4/22/2023: https://scottburns.com/choosemoney-or-life/

Sources and References:

2023 Trustees Report: V. Assumptions and Methods Underlying Actuarial Estimates:  https://www.ssa.gov/OACT/TR/2023/V_A_demo.html#22

2023 Trustees Report: Table II.D1: Projected Maximum Trust Fund Ratios During the Long-Range Period and Trust Fund Reserve Depletion Dates:  https://www.ssa.gov/OACT/TR/2023/II_D_project.html#125512

2023 Trustees Report: Table IV.A3: Operations of the Combined OASI and DI Trust Funds, Calendar Years 2018-2032: https://www.ssa.gov/OACT/TR/2023/IV_A_SRest.html#382302

2023 Trustees Report: Table VI.A3: Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2022: https://www.ssa.gov/OACT/TR/2023/VI_A_cyoper_hist.html#33

2023 Trustees Report: Table VI.G4: OASDI and HI Annual and Summarized Income, Cost, and Balance as a Percentage of GDP, Calendar Years 2023-2100: https://www.ssa.gov/OACT/TR/2023/VI_G2_OASDHI_GDP.html#103985

2023 Trustees Report: Table VI.G5: Ratio of OASDI Taxable Payroll to GDP, Calendar Years 2023-2100: https://www.ssa.gov/OACT/TR/2023/VI_G2_OASDHI_GDP.html#103985

Budget of the President 2023: Tax Expenditures:  https://www.whitehouse.gov/wp-content/uploads/2023/03/ap_19_expenditures_fy2024.pdf

2023 Trustees Report: Entire document outline: https://www.ssa.gov/OACT/TR/2023/trTOC.html

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo by Pixabay

(c) Scott Burns, 2023