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YOU DECIDE: Should you worry about Social Security?

October 16, 2009

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

For the first time in a quarter century, the Social Security system has had to dip into its reserve account to make scheduled payments to retirees. This means Social Security this year is paying out more in retiree benefits than it is taking in from contributions.

This seems like a scary trend for the millions of current Social Security recipients as well as for the millions more (including yours truly) who will begin collecting from the system in a few years. Does this mean Social Security is about to crash? Does it mean Social Security's funds have been mismanaged?

The good news is that most experts think Social Security's cash drain this year - and possibly next year - is temporary, and it is completely related to the recession. Recessions result in more unemployment and, therefore, smaller Social Security contributions. However, payments to retirees continue. Since the current recession has been devastating - the worst since the 1930s by most standards - it shouldn't be surprising that Social Security is running a deficit.

The good news is the Social Security deficits should stop once the economy begins growing and adding jobs. In fact, for over 25 years Social Security has been running surpluses - that is, collecting more in taxes than the amount paid to retirees. The total surplus in Social Security's account now amounts to over $2 trillion.

The bad news is that Social Security will at some point begin permanently to pay out more than it takes in and will start draining its $2 trillion reserve account. Eventually the reserve account will be exhausted.

Each year the managers of the Social Security system - the trustees - estimate two dates: when the annual deficits will start becoming permanent and when the $2 trillion reserve account will be totally depleted. The current estimates for these dates are 2016 for the beginning of annual deficits and 2037 for depletion of the reserve fund. After 2037, the trustees calculate, Social Security will collect enough money each year to fund only three-fourths of promised benefits.

So Social Security does have a long-run problem. Some say it's because Social Security's money has been mismanaged. They say Social Security surpluses have been invested in worthless IOUs.

Here's the real story. The framers of Social Security expected the system to accumulate surpluses over time, just as any retirement fund does. It would be silly to let this surplus cash sit around and not earn interest.

So Social Security's framers wanted the surpluses invested, but - understandably - wanted the investments to be safe. The solution was to invest the surplus cash with the federal government. While you may chuckle about the ability of the federal government to manage fiscal affairs, the truth is the federal government has an excellent track record with safe investments. The government's chief investment is U.S. Treasury securities. The government has never missed making scheduled interest payments on Treasury securities and has never missed paying back the original funds put in Treasury securities. This is why U. S. Treasury securities are viewed all over the world as the premier investment for safety.

Still, we shouldn't ignore the long run issues with Social Security. Indeed, the overriding issue is fairly simple. More people are retiring, retirees are living longer, and the contributions to Social Security won't keep up with the scheduled payments to retirees.

The options are also simple. We can work on increasing Social Security's inflow - by increasing Social Security taxes - or we can reduce Social Security's outflow - by increasing the retirement age, reducing the annual cost-of-living adjustment or just by cutting benefit checks by some percent. None of the options are appealing.

Or we could go with a completely different approach, such as turning Social Security into a large mandated 401k plan. Here, people would still be required to pay Social Security taxes, but now the funds would go into self-directed investment accounts controlled by each person. Whatever the account grows (or declines) to would be the basis for that person's Social Security checks when he or she retired. The government could supplement the contributions of very low-income persons. However, in 2005, a plan like this was debated in the nation and not accepted.

Even though the nation is focused on health care and the environment now, everyone knows some changes will need to be made to Social Security eventually. Collectively, what will we decide?

-end-

Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at October 16, 2009 09:32 AM