I’m going to start with this premise: Social Security is the most successful, self-sustaining social program on the face of the earth. According to the SSA, there is currently a $2 TRILLION surplus in the fund (more on that in a minute).
Yet every member of Congress, from both parties say that it’s going broke. What gives? Three things actually:
1) In 1984, when it was illegal to touch the Social Security Trust Fund, Ronald Regan got a law passed that allowed the government to “borrow” from the fund – much like we “borrow” money from China.
2) A Zero Lower Bound on treasuries.
3) High unemployment creating cash flow shortfalls
This is the way Social Security is supposed to work: I pay money into the trust fund through payroll tax. That money is then put into Treasury Securities so that the money I pay can keep pace with inflation, and still be worth a dollar 30 years from now. So if I paid $1 in 1986 into the fund, then that dollar is worth $2.13 today.
But now that Treasuries are near zero, and have been stuck there for the past 5 years, there’s not much interest to be had. Which means that the dollar I paid in 2008 is still worth a dollar today, when it should be worth $1.09.
The other part of this is high unemployment. SSA issued a report complaining of cash-flow shortfalls. The labor force participation rate is at the lowest level ever, at 64%. That means that 36% of working age adults are not paying into the fund. They will retire someday, and Social Security is obligated to pay them, whether they paid into the system or not.
The enigma is that as long as unemployment stays high, then treasuries will stay near zero. Interest on treasuries can only go up when people go back to work.
The obvious way to fix any future problem, real or imagined, is to get people back to work, by fixing a failed economy.
As for the $2 Trillion surplus, watch it disappear. The motivator for the GOP to cut social security is the same motivator that Ronald Regan had: raid the trust fund. That’s $2 Trillion of free money for the GOP. It could’ve paid off the banks during the TARP bailout – if only it were legal to use it.
Fixing the broken economy will get people back to work, more people will pay into the fund, treasury rates will rise, and then Congress will be swimming in money to raid. It’s a win-win all the way around!