Social Security - The Basics

The Social Security System is Not a traditional pension program like a private pension plan from a company.

The funding rules are completely different.  

Social Security is based on a “collect and pay as you go” basis. 

There is no “Investment Fund” like a company pension or 401K.

So, the SS program was designed to:

1.      Collect Payroll taxes from Workers and Employers.

2.      Pay Beneficiaries from the Funds collected. 

Over the early years, the Payroll Taxes exceeded Payments.  The excess funds are held in a surplus account (Trust Fund). These funds have been used to purchase U.S. Treasury Debt to fund the Federal Government’s Budget Deficit.

Social Security is not a fully funded plan like a Company required to maintain investments to meet future payments for beneficiaries.   This is a fundamental misunderstanding by the Public. 

Although SS started with the best of intentions, it is now a gigantic growth on the future obligations of the Federal Government.  It is simply not fiscally viable in its current format.

Demographics have changed the entire standing of the program.  Here is how the situation has evolved:

BACKGROUND

We will use 1950 as a Baseline Reference of SS Financials.  That is ten years after SS was fully implemented.

IN 1950:

Total Payroll Tax Receipts:                                                               $  3.9 Billion (Est.)

Total Beneficiary Payments:                                                           $ 961 Million

Amount Accumulated in SS Trust Fund:                                   $ 13.3 Billion

Number of Workers Who Paid SS Payroll Taxes:                48 Million

Number of Beneficiaries Who Received Payments:           3.5 Million

Ratio of Workers to Beneficiaries:                                        13:1

In 2010:

Social Security's benefit Payments began to exceed Payroll Tax revenues.  This shift necessitated withdrawals from the program's Trust Fund assets to cover the shortfall.   

While the fund grew slightly in total assets due to accumulated interest, it has been moving toward depletion - net cash flows have been negative since 2010.

IN 2022:

Total Payroll Tax Receipts:                                                               $ 1.14 Trillion

Total Beneficiary Payments:                                                            $ 1.15 Trillion

Amount in SS Trust Fund:                                                                $ 2.83 Trillion

Number of Workers Who Paid SS Payroll Taxes:                      181 Million

Number of Beneficiaries Who Received Payments:                66 Million

Ratio of Workers to Beneficiaries:                                                2.75:1

ANALYSIS:

The Social Security Trust Fund went to depletion mode in 2010 as payments exceeded revenue.  The current trend shows the Trust Fund will be totally depleted in about Ten Years.

The Demographic Reality of Social Security is evident from the Background numbers:

1.       Compare the Ratio of Workers who pay the Tax to the number of Beneficiaries: 

2.      In 1950 it was 13 Workers to 1 Beneficiary.  

3.      In 2022, it was less than 3 Workers to 1 Beneficiary.

With $ 2.83 Trillion in the Trust Fund, it will deplete at an average rate of  $218 Billion per Year until 2035 until the Fund is empty.

When the SS Trust Fund is depleted in about Ten Years, the Options for the Federal Government are a combination of:

1.      Raise Taxes.

2.      Cut Benefits.

3.      Borrow Money - Increase the Annual Federal Budget Deficit to cover Benefits.

The U.S. already has an Annual Federal Budget Deficit of about $ 1 Trillion, and National Debt over $30 Trillion. 

How can we expect the current Workforce to sustain funding for this Demand  -  We Can’t!

SUMMARY

The options will be harsh if we wait until the SS Fund depletes in 2035. 

Our Political Leaders continue to evade the looming crisis.

We need action while there is time to phase-in solutions that will minimize the impact compared to the future crises if nothing is done.

A complete Reform of the System is the only resolution.  That takes time, and there is no time to waste.

Cogport will propose some remedies to consider in the next post.

David Hollaender                            February 2, 2025

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