Will social security be there for you? Yes but…
By Wolf Richter for WOLF STREET.
The Social Security Trust Fund – officially the Old Age and Survivors Insurance Trust Fund (OASI) – ended fiscal 2020 at the end of September with a balance of $ 2.81 trillion, the second highest. fiscal year end, after 2017, up $ 6.8 billion from a year ago and a $ 10 billion increase from two years ago, according to data released by the Social Security Administration. The trust fund has faltered in the same range since 2016, having grown significantly over the past decade.
The balance is seasonal and the peak is in June. The all-time high was in June 201
The trust fund invests exclusively in special-issue Treasury notes, of two types: $ 2.797 trillion in interest-bearing long-term special-issue Treasury notes and $ 14 billion in short-term cash management securities, called “certificates of debt. “. These securities are not publicly traded and therefore their value does not change from day to day with the vagaries of the market. The trust fund buys them at face value and the US Treasury redeems them at face value.
Conversely, a bond mutual fund that holds negotiable Treasury securities must “mark the market” of its Treasury securities on a daily basis (producing a gain or a loss).
By investing exclusively in Treasury securities that are not exposed to the whims of the market, the trust fund follows the most conservative, i.e. low-risk, strategy possible.
This setup is an efficient and cost-effective way to administer the trust fund and does not allow Wall Street to extract fees and load the fund with risk. That’s why Wall Street hates the trust fund and wants to “privatize” it to get its hands on the $ 2.8 trillion, extract its taxes, and use it as a dump for its risks.
According to the 2020 fiduciary report, 54 million people benefited from social security pension benefits at the end of 2019:
- 48 million retirees and retired dependents
- 6 million survivors of workers died.
The Disability Insurance Trust Fund (DI) is separate from the OASI Trust Fund and is not part of this discussion here. But just to note: in 2019, it paid benefits to 10 million disabled workers and dependents of disabled workers.
In 2019, 178 million people paid social security through payroll taxes. These contributions, along with interest income on the securities, generated revenue of $ 1.062 billion. Total program costs were $ 1.059 billion. A $ 3 billion surplus. It was for the fiscal year 2019.
The Trustee Report for Fiscal Year 2020 – the Trustee Report 2021 – is not yet available, but we already know that the Trust Fund has grown by $ 6.8 billion this year. So far, so good.
Three issues: demographics, Fed interest rate crackdown and inflation.
For now, the trust fund is benefiting from the fact that millennials have entered the workforce and are gaining earning power as they increase their jobs. But there is also the brake on the Fund of the boomers who are now between 55 and 75 years old and are moving to retirement in increasing numbers. In recent years, the equation has been in balance: millennials and boomers are both huge generations. But it will gradually change, and when it does, it will appear as a downward slope from the line in the graph above.
The Fed’s repression of interest rates.
The effective interest rate earned by trust fund securities has been declining for years, particularly after the financial crisis, when the Fed used QE to force long-term interest rates down. And the Fed’s current interest rate crackdown will manifest as lower interest income in future years.
In September, the weighted average interest rate earned on bonds was 2.53%, still higher than current Treasury yields, thanks to long-term bonds carrying the highest interest rates of yore. But since 2009 it has decreased by about half. And at current interest rate policies, the declines will continue.
Despite the 27% growth of the trust fund from $ 2.22 trillion in 2009 to $ 2.81 trillion in September 2020, the interest income decreased by 30% over the same period:
Beware of the vicious dog: inflation higher than COLA.
Monthly social security payments are adjusted for inflation through “Cost of Living Adjustments”. These annual adjustments are based on a formula that uses the “Consumer Price Index for All Urban Employees and Employees” (CPI-W) in July, August and September. The Bureau of Labor Statistics will release the CPI for September on October 13th. The COLA for 2021 will be set later. So just guessing here, based on the CPI-W for July (0.96%) and August (1.40%), and the upward trajectory it has been on in recent months, this COLA adjustment for 2021 could be understood between 1.3%.
The actual costs of living for retirees – or indeed anyone – will increase much faster, depending on where they live, how they live and where they spend most of their money. Even though the actual cost of living only rises 1 percentage point faster than the annual COLA each year, after 10 years, 20 or 30 years, you are talking about a serious deterioration in the purchasing power of social security payments. Inflation will eat more than retirees’ lunch.
Efforts to make inflation even more pernicious.
Discussions are underway to move COLAs from CPI-W to a chain price index because they are below the CPI-W, and therefore, in small increments each year, inflation would further affect the purchasing power of social security payments.
Someone might barely be able to peek into Social Security and use their savings – if they only have one – to supplement their budget. But every year, this becomes more difficult, and this retiree will have to reduce, reduce and reduce year after year…. Whenever this shift to a chain-like index for COLA shows up in Congress, there should be a deafening tone and a shout from everyone, young and old, because it would undermine social security as a safety net.
So, Social Security will be there for you, but …
You can rely on social security payments. But they will lose purchasing power. The purchasing power of payments will decrease year after year, year after year, because COLAs are not enough to cover the actual increases in the cost of living.
This is just a simple fact, and it is not an accident, it is deliberately integrated into the system. And this drop in purchasing power could reduce your standard of living by 20% or 30% in the first 20 years of retirement. If it was hard to live with Social Security early on, it will be brutal after 20 years. And people have to add this into their calculations.
Hypothetical exhaustion of the trust fund.
If the demographics shift in the wrong direction and the interest rate crackdown continues, the Trust Fund will eventually pay more each year than it receives from contributions and interest, and the balance will begin to decline. And if no adjustments are made to contributions or payments, and if demographic changes continue, the Trust Fund will be exhausted at some point. The Directors estimate that the Trust Fund will be exhausted in 2034 unless certain changes are made.
The depletion of the trust fund does not mean that social security will collapse or be “broke” or anything. It simply means that workers will have to pay a little more or the benefits will be reduced, or both. Social security was fixed earlier. Increasing the maximum amount of income subject to social security tax would be one way to do this, and it has been done before. And there are other ways. These adjustments will be made, as in the past, well before the depletion date.
The story of the man who told me Social Security would collapse before he could tap into it.
Over the decades, I have heard many predictions about the implosion of social security. But here’s what I never forgot because I was an impressionable age. When I was in high school, my better half’s father told me that Social Security was a “scam” and that it would explode before he could ever use it. He was a CPA and had an accounting and tax firm. He passed away a few years ago after collecting social security monthly during his retirement. And now his wife is collecting her Social Security survivors’ benefits. Social Security outlived him and will outlive me too.
But social security was never designed to provide an adequate pension on its own. My solution is to save money while you work and work as long as possible, well past retirement age, especially if you have something interesting to do. Look at all these old politicians: they’re all horny, they’re having a good time, and they’re not going to let go of that much fun, or the profits that go with it, unless someone throws them out. And I intend to do it too: keep working, excited, and have fun with my wicked empire of WOLF STREET media moguls until my brain freezes.
As after the last crisis, fueled by ultra-cheap money, they are taking the financialization of the real estate market to the next level. To read… The greats are back: financing single-family homes
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