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Saturday, July 30, 2016

Social Security and Disability Insurance...A 29% Reduction in Benefits Already Mandated by Law...More Cuts to Come


In 2010, Social Security (OASDI) unofficially went bankrupt.  For the first time since the enactment of the SS amendments of 1983, annual outlays for the program exceeded receipts (excluding interest credited to the trust funds).  The deficit has grown every year since 2010 and is now up to 8% annually and is projected to be 31% in 2026 and 44% by '46.  The chart below highlights the OASDI annual surplus growth (blue columns) and total surplus (red line).  This chart includes interest payments to the trust funds and thus looks a little better than the unvarnished reality.

For a little perspective, the program pays more than 60 million beneficiaries (almost 1 in 5 Americans), OASDI (Old Age, Survivors, Disability Insurance) represents 25% of all annual federal spending, and for more than half of these beneficiaries these benefits represent their sole or primary source of income.

The good news is since SS's inception in 1935, the program collected $2.9 trillion more than it paid out.  The bad news is that the $2.9 trillion has already been spent.  But by law, Social Security is allowed to pretend that the "trust fund" money is still there and continue paying out full benefits until that fictitious $2.9 trillion is burned through.  To do this, the Treasury will issue another $2.9 trillion over the next 13 years to be sold as marketable debt so it may again be spent (just moving the liability from one side of the ledger, the Intergovernmental, to the other, public marketable).  However, according to the CBO, Social Security will have burnt through the pretend trust fund money (that wasn't there to begin with) by 2029.


Below, the annual OASDI surplus (in red) peaking in 2007, matched against the annual growth of the 25-64yr/old (in blue) and 65+yr/old (grey) populations.  The impact of the collapse of the growth among the working age population and swelling elderly population is plain to see.  And it will get far worse before it eventually gets better. 

From 2017 through 2029, the present 170 million person 25-64yr/old population will grow by just 5 million.  The current 51 million person 65+yr/old population will grow by 22 million.  And it won't get much better after that as the older population keeps swelling with boomers living progressively longer.


Beginning in 2030 benefits will have to be paired up with tax collections according to current law.  By present calculations, this means an initial 29% reduction in benefits.  The reductions will only become larger from there.  The average benefit check in 2016 is $1341/mo, or $16,000/yr.  A 29% reduction on the average payment will be <-$390/mo> and the reductions will keep growing for the rest of our lives.  For couples, this means their initial combined benefit will be $22.850 instead of $32.000.


Americans turning 67 in 2030 will be told that after being mandated to pay their full share of SS taxation throughout their working lifetime, they will not see anything near their full benefits in their latter years.  However, those in retirement now and those retiring between now and 2029 are being paid in full despite the shortfall in revenue.  They will be paid in full until this arbitrary "trust fund" is theoretically drained.


I have no intention of funding, in full, current retirees benefits with my tax dollars only to know I will hit the finish line with a 30%+ reduction that will only worsen over time.  My goal is to pay it forward to my kids and then do my best to never to be a burden to them.  The SS (OASDI) benefits must be cut now to be in line with revenues.  Raise taxes, lower benefits...your choice.  But I'm not about to make the old whole so I can then subsequently see my generation go bankrupt in my latter years.


Conclusion-
1- There was a trust fund, but Executive and Congressional tinkering along the way has seen that is has been entirely spent (artificially and temporarily boosting the economy along the way).  It's gone and issuing more debt in it's place is just asinine.
2- With immediate effect, benefits must be cut or taxes raised...you choose.  We can't pretend any longer and attempt to push the consequences out another generation.  Times up.  The pain must begin now and must be shared equally by all.


For more details about what we and the next president will face...HERE

9 comments:

  1. Hi Chris - nice analysis, except for the conclusion. Opting out of the system and having your own retirement plan is, was and will be better no matter when you start. Try running the numbers on your yearly SS "contributions" @ 8% compounded for 30-40 years and where do you end up? With an annual check 10X larger than SS.

    Before you go nuts on "how can you make 8% every year?" 8% granny can make in her sleep, and in a tax advantaged account, it can easily be 20%.

    YRMV

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  2. Do you own a Treasury bond note or bill? Well if you do then according to the author you and the Treasury are only pretending you will get your principal and interest back.

    Now in the big scheme of things and long term that is possibly correct and you won't get your principal and interest. That would of course mean that the US Treasury has gone into default in which case it would be financial Armageddon. US Treasury securities are the worlds baseline financial asset and their safety as to repayment is sacrosanct. However the author here like virtually everyone who discusses SS can't wait for the Treasury to default on its obligations to SS, Go figure.

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  3. There was no real trust fund of investments -- only non-negotiable IOUs.

    SS is not broke -- there are still plenty of IOUs to cash in.

    No one addresses the demographics problem.

    The last time I read the trustees reports a few years ago, the "deficit spending" for Medicare and SS accounted for most of the Federal Budget deficit.

    The goobermint won't "cut" benefits -- they'll raise taxes on them for higher income retirees, and raise the retirement age another year or two.

    These senior citizen "retiree welfare" programs will be redefined as being intended for people who really needed the money / medical services -- more means testing.



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  4. " With immediate effect, benefits must be cut or taxes raised…you choose."

    Obvious nonsensical crap aimed to divert blame away from where it belongs.

    The federal government owes the money and is morally obligated to pay up. They can go into receivership, be forced to use money more efficiently, or ultimately liquidate assets to pay their debt.

    To even suggest the choice is between refusing to pay their debts, a form of robbery, or taking yet more money from people, another form of robbery, is a bizarre grotesque idea.

    So this author's solution to organized crime is to punish the victims to make sure the criminals are safe.

    Completely nuts.

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    Replies
    1. Thanks anon - point is money was collected, money was spent, and now if those IOU's are to be honored...taxes can be raised or benefits cut. As for your potential solutions, I'm all for using tax revenue more efficiently and would love to see the howls as all the savings to fund SS (w/out higher taxes or lower bene's) would need to come from the 30% of the federal budget that is discretionary. Tough stuff.

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  6. Very useful topic. I will be pleased if you calrify about California Business Insurance

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