Here's Why Our National Debt Isn't a Concern for Social Security

Among our nation's social programs, arguably none is more important than Social Security. Each and every month, more than 62 million people receive a benefit check, and nearly 45 million of them are aged beneficiaries (65 years old and over). Of these older Americans, just over 60% relies on Social Security to provide at least half of their monthly income, with an estimated 15.1 million seniors being kept above the federal poverty line as a result of their guaranteed monthly check.

Unfortunately, this paycheck that retired workers have leaned on for the past 78 years now finds itself in danger of being reduced in the not-so-distant future.

Social Security's judgment day is rapidly approaching, report suggests

According to the latest annual report from the Social Security Board of Trustees, a big change is underway. Beginning in 2018, and continuing with each passing year, at least through 2034, Social Security is estimated to be paying out more in benefits than it generates in revenue. Though this net cash outflow will be small at first, totaling just $1.7 billion and $0.2 billion, respectively, in 2018 and 2019, it's expected to catapult to a $169 billion net cash outflow by 2027.

Though congressional action is the real wildcard here, assuming lawmakers do nothing and allow the program to run its course, the combined asset reserves of the Old-Age and Survivors Insurance Trust and the Disability Insurance Trust -- currently $2.9 trillion -- are expected to run out completely by 2034. Should this happen, the report forecasts the need for an across-the-board cut in benefits of up to 21% in order to sustain payouts through the year 2092, without any additional cuts. Considering how reliant existing retirees are on Social Security, any sizable cuts are liable to be disastrous.

The growing national debt dilemma

However, this isn't the only cash crunch pundits have suggested could threaten Social Security. There's also the belief that our nation's growing debt levels -- 105.4% of gross domestic product as of the end of 2017 -- could compromise the ability of the federal government to make good on its outstanding debt.

What do federal debt and Social Security have in common, you ask? Well, Social Security's aforementioned $2.9 trillion in asset reserves aren't just sitting in a vault collecting dust. That would be a poor move on the part of the Social Security Administration and the federal government, as this excess cash would lose purchasing power over time as inflation galloped ahead.

Instead, this cash is invested in special-issue bonds and, to a far lesser extent, certificates of indebtedness. As of May 2018, the average yield across all of the different assets held by the Social Security Trust was about 2.9%. In other words, Social Security buys bonds with its excess cash, the federal government then uses this cash to fund general revenue line items, and Social Security receives interest payments from the federal government until the bond(s) mature.

Where concern crops up is with regard to the rising percentage of revenue the federal government is having to devote to paying interest on existing debt as its outstanding debt levels increase. At some point, the federal government may not be able to make the full interest payment to Social Security, or fully redeem a bond, if interest payments grow too burdensome.

Relax, the debt issue is unlikely to impact Social Security

While this debt concern is very real, there are two reasons why it shouldn't concern beneficiaries.

To begin with, the interest income that Social Security generates from its asset reserves only accounted for 8.5% of all revenue collected ($85.1 billion) in 2017, and is expected to decline as a percentage of total revenue over the next decade. Most of the heavy lifting is done by Social Security's 12.4% payroll tax on earned income ($873.6 billion in revenue generated in 2017), and to a smaller extent the taxation of benefits, which is estimated to surpass interest income in aggregate revenue generated by 2026. These two sources of revenue ensure that money will continue to flow into the program, allowing the Social Security Administration to make payments to eligible beneficiaries, regardless of whether debt levels continue to climb.

The other consideration here is that it's likely going to take many decades before the potential for a nonpayment of interest even creeps into the picture. But, as noted, Social Security's $2.9 trillion in asset reserves are expected to be completely exhausted in 16 years, which is well before the federal government's debt levels would be in the danger zone. Without any excess cash, no special-issue bonds would be purchased and, therefore, no interest payments would be made.

The only chance Social Security has of running into national debt issues would be if Congress passes sweeping overhauls to the program between now and 2034 that preserves the Trust's asset reserves. If these asset reserves are invested into special-issue bonds for perhaps 50 to 75 more years, then the growing national debt could present a genuine concern.

Of course, Congress has a habit of playing kick the can with Social Security, leaving what I believe is little opportunity for national debt levels to be a nuisance to America's most important social program.

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