2005 Year in Review

Social Security bankrupt?

Social Security provides pension benefits for Americans who are primarily over the age of 62. It is funded by payroll taxes. So, the taxes you are paying right now on your payroll (up to $90,000 in 2005) are used to pay benefits for beneficiaries - perhaps to your parents or grandparents.

Currently, there is more money going into the fund than is going out as benefits. This is called a surplus. The money is invested by Social Security in US Treasury bonds.

That's good.

But, the bad news is that by about 2020, the fund will start running deficits. That means that there will be more money going out as benefits than there is money coming in through payroll taxes.

But, that seems okay since Social Security has this large surplus that has built up over the years. It can just dip into its Treasury bonds to pay benefits.

That's good.

But, again, the bad news is that somewhere around 2050 that surplus account will be gone. Running deficits from 2020 to 2050 may pretty well empty the account. However, after 2050 Social Security will still get enough payroll taxes to pay about 75% of benefits.

Does that mean it could be called 'bankrupt' as the President claims? Bankruptcy indicates that it would be incapable of discharging its debts.

But what debt would Social Security have that it couldn't discharge? The only debt would be a promised benefit in 2050. But, these benefits can be and are changed by Congress. If Social Security can make 75% of its present benefits it would surely be a hardship on many of the elderly, but it would not be defaulting on its promise.

I think calling this ‘bankrupt’ is an exaggeration. Using the term 'bankruptcy' seems inflammatory.

Additionally, many question the economic assumptions that show the surplus running out by the middle of this century. These assumptions are unduly pessimistic. If you are even slightly more optimistic about the economy over the next half century, the deficits disappear and Social Security can make its benefit payments.

No crises. No bankruptcy. No problem. That's good.

But, maybe we should use pessimistic assumptions. After all, many of the elderly are nearly totally dependent on Social Security.

In future columns we'll take a look at the President's plan for privatization (or personal accounts, as they like to call them) and some other possibilities for protecting Social Security.

by John Legler, Guest Columnist
February 8, 2005