Kevin E. Cahill, PhD & Gene J. Kovacs, PhD

Kevin E. Cahill, PhD & Gene J. Kovacs, PhD

The three pillars of retirement income – Social Security, private pensions, and savings – are shaky these days.

  • The Trustees of the Social Security program report that, as of 2033, the trust fund will run dry and system revenues will not be sufficient to pay 100 percent of promised benefits under current law.
  • Traditional defined-benefit plans — ones that pay predetermined monthly benefits throughout retirement — have been largely usurped by 401(k) plans, leaving individuals exposed to investment risk and, for those who do not convert to annuities, longevity risk.
  • Savings offer no real buffer either, because the typical older household has less than $100,000 in non-pension, non-housing assets— hardly sufficient to support 20 years of leisure later in life. Today, one in three older Americans relies not on savings but on Social Security benefits for the bulk (80 percent or more) of their family income.

Given the status of these traditional sources of retirement income and the precarious prospects for the future, most of us are going to need to work beyond traditional retirement ages if we want to mitigate any loss in our standard of living.

Maybe that’s not news to you. Well, get ready: the situation is even bleaker.

In 2012, the Social Security administration reported that tax contributions were insufficient to cover costs, or benefits paid. The red ink in the near term is rarely reported, however, because the Social Security Administration plans to tap into its trust fund assets for benefit payments. Those assets are invested in U.S. bonds, and while they are “backed by the full faith and credit of the U.S. government,” that just means we taxpayers will not default on our commitment to the Social Security Administration. In fact, the fiscal 2000 U.S. Budget explains that “these funds are not set up to be pension funds … they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.”

Any one of these options — or all three — will negatively impact today’s retirees, tomorrow’s retirees, or both, and the situation is unavoidable. Why? Because, quite simply, our contributions to the trust fund have already been spent.

Until very recently, as contributions from the Social Security program exceeded costs, the Treasury department complemented its general revenues with Social Security contributions, and spent them on a myriad of government activities (as the graphic shows). In return, the Treasury issued IOUs to the Social Security Administration, with the intention that further down the road the Treasury would repay the IOUs with income taxes and/or borrowings. Further down the road means now, though, and, with a deficit in 2012 exceeding $1.2 trillion, the Treasury has no choice but to borrow to repay the Social Security Administration.

We take no stance as to the wisdom of the Treasury’s choices in the past. We would, however, like to comment on two explanations that we have come across to justify these actions.

The first argument is that the excess contributions from the Social Security program were not spent but, rather, “invested.” The excess contributions have been put toward roads, bridges, and any number of government-backed initiatives over the years — money that would have otherwise required borrowing at the time the resources were spent. So, while there are no hard assets in the trust fund, our government has claims on public goods that were made possible through the trust fund dollars. While this argument may sound legitimate, it is highly suspect. Can you imagine how people would react if the leadership at Ford announced it was going to “invest” Ford’s pension assets on a new plant in Michigan? Or worse, that Ford was going to “invest” pension fund assets on Super Bowl ads? Or a company picnic or even executive salaries?

The other argument is that the Treasury has already accounted for the fact that it will need to borrow to replenish the trust fund. The only difference from an accounting perspective is the fraction of total government debt that is held by the public, which increases as the Treasury actually starts borrowing to replenish the trust fund. While this is a truism, the fact that the Treasury has planned to borrow, and thus further obligate the very taxpayers who receive Social Security benefits, does not in any way mean retirees will receive the benefits originally promised.

One thing is clear – the Social Security program did not cause this mess, and it would be wrong to label the Social Security program a failure because of this situation. Quite the contrary, the Social Security program has been an enormous success in lifting older Americans out of poverty. The problem with the trust fund has very little to do with the Social Security program itself and a lot to do with the way our government functions generally.

So, what to do? We could begin by at least acknowledging our current predicament. The mainstream view in both academia and the media is that the Social Security program is solvent to pay full benefits through 2033, as the program draws down the trust fund. We disagree. The relevant date was 2010. The year 2010 is when contributions into the system were insufficient to cover current outlays — a discrepancy that is projected to occur every year throughout Social Security’s forward-looking 75-year budget window.

For the past two years – and every year going forward under current law – the Social Security benefits paid to older Americans have been and will be financed in part with borrowed funds. This arrangement is unsustainable. Regardless of what our government does about it, we should all start preparing accordingly as we think about how long we plan to work later in life.


The views expressed in this article are those of the authors and do not necessarily reflect the views of Analysis Group or ECONorthwest.


Kevin E. Cahill, PhD
Research Economist
Sloan Center on Aging & Work
Phone: 617.552.9195

Gene J. Kovacs, PhD
Vice President
Analysis Group, Inc.
Phone: 617-425-8118