Posted May 14th, 2011 on MTWorld.com
When will the Social Security system run out of money? Well, the US Treasury Department announced recently that 2011 will mark the first tipping point for Social Security since we emerged from the last protracted recession in 1983. That is, more benefits will be paid out in 2011 than will be collected by the Treasury Department. Fortunately, this is expected to be a short-lived phenomenon (for now). An ultra-high unemployment rate approaching 10% has resulted in a substantial reduction in wage tax collections in recent months. The current shortfall is expected to last for a couple of years at which point the Treasury predicts we will return to a surplus situation for a few more years as the economy picks up some steam.
But beginning in 2015 and thereafter, an enormous wave of Baby Boom Retirees will push the Social Security plan into a permanent death spiral – where payouts to retirees will overwhelm incoming wage taxes to the point that the surplus that has been built up over decades of time will begin to be drawn down at an increasingly rapid rate.
So what is the end game? For starters, if the most recent actuarial statistics are accurate, the Social Security surplus fund, which currently stands at about $2.5 Trillion will run out of money and be completely depleted by 2036 – a year sooner than earlier estimates. Of course, this so-called $2.5 trillion dollar surplus is not real money mind you, but an IOU from Uncle Sam who has already spent the money with a promise to repay it. Once the “surplus fund” is depleted, the Social Security system will rely completely on new tax revenues to pay for an increasing level of benefits. Unfortunately, as the Administration looks into its crystal ball it expects that wage tax revenues will only generate enough to cover about 75% of the demand for benefits after 2036. Someone will have to go without…
So how worried should you be? To some degree it depends on when you were born — and how long you expect to live. With a retirement age currently set at 67 for the latest generation of baby boomers and assuming an average lifespan of approximately 78 years (based on latest published averages), if you were born in 1958 or before you are home free (assuming you have any faith at all in the current system). For those born in 1959 and beyond, the outlook is murkier. In all likelihood the Federal Government will make good on its commitments to Social Security beneficiaries – in the same way it will make good on its obligations to investors and foreign countries that fund our ongoing deficits by purchasing US Treasury Bonds. Of course “making good” may come at a high cost in terms of potential inflation, which will serve to erode the real value and purchasing power of any benefits received.
Another thing to keep in mind is that there is a lot of attention focused on trying to fix the soon to be defunct social security system prior to D-day. This may mean some combination of increasing the retirement age for younger workers, reducing benefits to retirees, and increasing the social security wage tax rate in an effort to right the ship before it sinks. Stay tuned!