More Young People May Enjoy Secure Retirements
The deteriorating outlook may sound ominous, but the picture is brightening as tax revenues rebound and fewer people are applying for early benefits. As the economy recovers, the slide in the trust fund is being reversed. Congress still has plenty of time to avoid shortfalls that could occur decades down the road.
"Social Security has been around for 77 years," says Virginia Reno, vice president of the National Academy of Social Insurance, a nonpartisan think tank. "Policy makers have always dealt with funding problems in the past, and it is inconceivable that they will allow benefits to drop abruptly."
To understand why Social Security is rock solid, consider that the system is supported by payroll taxes. Workers pay 6.2% of their earnings and employers put in a similar amount. The money is used to cover checks that are sent to retirees and people on Social Security disability plans. Excess cash is invested in Treasury bonds.
Social Security collects interest from the bonds in the trust fund and uses that to cover checks. When taxes and income don't cover outgoing payments, the program must sell Treasury bonds to raise cash. Since 1935, the program has collected $15.5 trillion and spent $12.8 trillion. The current balance is $2.7 trillion. That figure is supposed to grow to $3.1 trillion in 2020.After that, Social Security will be forced to spend the reserves until they are exhausted. Some observers have argued that the use of Treasury bonds amounts to a shell game. But that is unfair. Treasuries have long been considered one of the safest investments in the world. That's why many foreign governments and private pensions hold the U.S. securities. If Congress takes no action by 2035, Social Security will still be able to pay out more than 75% of full benefits. But it seems unlikely that Washington will sit back and let a popular program languish. In 1983, Congress avoided a shortfall by making a series of changes, including an increase in the retirement age. In the coming decades, the program could be fully protected by increasing taxes a bit or making small cuts in benefits. Odds are very good that Congress will take the necessary steps to protect the safety net that has proved to be one of Washington's greatest successes. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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