Well, the latest official report on the status of Social Security has just dropped, and it’s a doozy.
So far the headlines have focused on the so-called ‘insolvency date,’ meaning the year the Social Security Trust Funds are expected to run out of money. On this there’s been some modest good news: During 2020, despite the pandemic and the associated crisis, the insolvency date has moved up only one year, from 2035 to 2034. (That’s less than many had feared.)
Never mind that the independent Congressional Budget Office is putting the date sooner, at 2032.
But as usual with these reports, the devil is in the details — and deeper into the hundreds of pages of documents just published by the trustees.
Charles Blahous, a former Social Security trustee under President Obama and now at George Mason University’s Mercatus Center, argues that the insolvency date is far less important than the headlines imply. The key number to look at, he says, is the so-called ‘unfunded obligation.’
This is basically the hole in the accounts: The projected funding shortfall.
The usual way of looking at this is to work out how much extra we would need to find to finance Social Security for the next 75 years. Here the change in just one year is alarming. This deficit jumped $3 trillion last year, from $16.8 trillion to $19.8 trillion. That’s a huge change — 18% — in a single year. And note that this figure, for 2020, reflects only part of the crisis.
That figure is how much money we’d have to find right now, in theory, if we wanted to put the trust fund on a financially sound basis immediately (fortunately, we don’t have to do this immediately).
It’s nearly equal to an entire year’s U.S. gross domestic product.
Much deeper in the report are some other calculations. These refer to what’s called the “infinite horizon unfunded obligation.” Forget 75 years: This figure is the amount of money we’d have to find today if we wanted to put Social Security on a financially sound basis forever.
That figure? A staggering $59.8 trillion, or nearly three times U.S. GDP. And that rocketed $6.8 trillion in a year. Do we have to find that money now? No. Do we have to find most or all of that money within the lifetimes of today’s children? Maybe. Seventy-five years is a long time. Who knows what the world will look like on the cusp of the 22nd century.
But even the 75 year deficit is alarming. And to keep this funding gap down to $19.8 trillion, the trustees have had to rely on some remarkably — some might say, charmingly — optimistic economic assumptions.
For example, all of Social Security’s money is ‘invested’ in U.S. Treasury bonds (It is, in other words, a pension fund entirely invested in IOUs issued by the institution that runs the pension fund. Imagine, say, GM investing all of its pension in GM bonds).
The Trustees in their latest report are expecting, or assuming, that by 2028 these bonds will be earning 4.6% a year on behalf of the fund, or 2% above what they expect will be the rate of inflation.
Alas, nobody told the bond market. Right now even 30 year Treasury bonds yield only 1.92%, and anything with a shorter maturity offers less than that. The 10 year Treasury Note pays 1.3%.
And far from expecting a so-called ‘real’ yield of 2%, meaning a yield 2 percentage points above the rate of inflation, the bond market is predicting real yields of minus, pretty much as far as the eye can see. Treasury inflation-protected securities, or TIPS, are Treasury bonds that adjust your returns to compensate for changes in the official inflation rate. Right now they’re offering inflation minus 1.3% over 7 years, minus 1% over 10 years, and minus a third of a percent even over 30 years. There is nary a positive real yield on offer, let alone one of 2% a year. (By early next decade the trustees think the fund will be earning inflation plus 2.3% a year on its investments).
The bottom line for all of us is that Social Security faces a funding crisis that under conventional economics would require higher taxes, low benefits or both. Happily (or not), these days presumably they can just ask the Federal Reserve to print the money. “Print, baby, print!”
What’s $20 trillion between friends?