Did you see this bit of news recently?
The Social Security Administration announced earlier this month that it would have to dip into its trust fund for the first time in 36 years.
With the Baby Boomers retiring in droves, the Social Security system is now paying out more in benefits than it’s taking in as tax revenue.
And if current trends hold, the trust fund will be completely depleted by 2034.
That sounds bad. Really bad.
But it’s actually worse than you think.
Social Security is dipping into a trust fund that doesn’t actually exist. There is no trust fund.
No, it wasn’t stolen in some Ocean’s Eleven-caliber heist. And no, I’m not a conspiracy theorist who believes it was an elaborate plot by our government to lie to us.
But I’m 100% serious when I say the Social Security trust fund doesn’t exist, nor has it ever existed – at least not in the way you or I would understand a “trust fund.”
Let’s start with the basics.
What is the Social Security trust fund?
The Social Security Administration essentially has two accounts at the U.S. Treasury: The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. We’ll call both collectively the “trust fund.”
You and I and every other working American contribute to these funds through our payroll taxes: 6.2% of your paycheck (up to the first $128,400) goes to Social Security, and your employer chips in another 6.2%.
For the past 36 years, tax revenue coming in was greater than benefits going out. The accumulated surplus makes up the trust fund.
That sounds straightforward enough. At its heart, it’s not too different than the way all of us save for retirement.
There’s just one big problem. The surplus cash might go to the trust fund, but it doesn’t stay there. It gets sucked into the current expenses of the U.S. government and replaced with an IOU.
The trust fund’s assets are “invested” in U.S. Treasury bonds, and the cash is used to fund the current expenses of the government.
If you or I buy a U.S. Treasury bond, that debt obligation of the government is an asset to us.
But that’s not exactly what is happening here. Remember, Social Security is the government. So, the government is lending to itself and calling it an asset.
That doesn’t work in the real world.
I can write myself a check for a million dollars, but that doesn’t make me a single penny richer. I’m just shuffling the money from one pocket to another.
So, when I hear that Social Security is having to dip into its trust fund, I roll my eyes.
The so-called trust fund was never more than an accounting trick.
The idea that there was cash set aside for our retirement by the wise mandarins running the government was a convenient fantasy.
Keeping the fantasy alive actually isn’t that hard. If Congress raises payroll taxes, raises the retirement age or finds other stealthy ways to reduce benefits, such as by means testing or tinkering with inflation assumptions, we can rebuild the “trust funds” in a hurry.
For that matter, the U.S. Treasury could create a quadrillion-dollar superbond to prefund the trust fund from now until the end of time, and then promptly lend the money back to itself.
But what difference would it make? It’s all just accounting.
The reality is that the retirement of the Boomers is going to force the government to make some uncomfortable choices.
A current deficit (benefits going out being larger than payroll taxes coming in) means that the money has to come from somewhere else.
That means that taxes go up, other spending goes down or we simply borrow more. None of those options are desirable.
I don’t know about you, but I don’t feel comfortable depending on accounting gimmickry to fund my retirement needs or those of my family.
And, if anything, this just reinforces my belief that you must create your own income streams in order to have the type of retirement you want.
That’s why I started writing Peak Income, my newsletter dedicated this exact idea. Click here to learn more about it.
This article first appeared on Sizemore Insights as Can You Trust the Social Security Trust Fund?