Is Social Security Really Broke?

The Truth about Social Security Financing

When Kathleen Casey-Kirschling, the nation's first baby boomer, received her retirement benefits a few months ago, skeptics believe that was the signal. For people who are under the impression that social security is failing, this is an indication that the program will go bankrupt, as more baby boomers will start claiming their benefits and the funds will run out. These people believed that as a result, the agency would be unable to fulfill its promise to other claimants.

Is it true?

Contrary to this belief, as early as the 1980s, the government has already taken steps to strengthen Social Security and prepare for other adjustments, not only for the boomers. In 2001, President Bush had even created a federal commission to look into ways on how to undertake necessary changes in social security system to address future problems.

According to the 2008 Trustee Report, changes made on the program have paid off as it showed steady improvement in the program’s long-term financial status.

The agency may be facing challenges today but these are problems brought about by the reforms being undertaken within the system.

“Social Security is at a crossroads. We face enormous challenges to shore up the system,” said Commissioner Michael J. Astrue in the agency’s press release. “I will continue to work with President Bush, Congress and our stakeholders to develop policy solutions. I also look forward to working with the next administration, since the challenges that face the Social Security system will undoubtedly require a bipartisan and multi-year effort.”

The report also highlighted the following accomplishments:

Income including interest to the combined Old Age and Survivors, and Disability Insurance (OASDI) Trust Funds amounted to $785 billion ($656 billion in net contributions, $19 billion from taxation of benefits and $110 billion in interest) in 2007.

Total expenditures from the combined OASDI Trust Funds amounted to $595 billion in 2007.

The assets of the combined OASDI Trust Funds increased by about $190 billion in 2007 to a total of $2.2 trillion

During 2007, an estimated 163 million people had earnings covered by Social Security and paid payroll taxes.

Social Security paid benefits of $585 billion in calendar year 2007. There were almost 50 million beneficiaries at the end of the calendar year.

The cost of $5.5 billion to administer the program in 2007 was a very low 0.9 percent of total expenditures.

The combined Trust Fund assets earned interest at an effective annual rate of 5.3 percent in 2007.

How is that possible?

The estimated 65 million boomers have actually paid into the system and together with the 89 million other employed Americans, have helped build a reserve. In addition, nearly one in three retired Americans are contributing to the trust funds by paying taxes on their Social Security.

Others may argue that the worker-to-retiree ratio is declining and that life expectancy is increasing, which place a strain on social security funds. However, these factors – including those of the boomers – have long been thought of. The issues of changing demographics and immigration have also been taken into account before the projections were made.

In fact considering all these factors, and granting that there will be no changes, Social Security can still pay 100 percent of promised benefits until 2040 and more than 70 percent of benefits after that.

Now perhaps it would be fair to say that social security income will grow and continue to pay for benefits of the claimants. Through income earned from the trust funds, the agency can earmark enough funds for benefits and administrative costs. Whatever amount remains from the income after benefits and other expenses are deducted will be treated as surplus and added to the trust funds.

One of the big reasons why the country’s social security system will not fail is because of the treasury bonds. The Social Security trust funds buy interest-earning special Treasury Bonds, similar to the government bonds pension funds and private investors buy. By law, all income to the trust funds not immediately needed to pay expenses, is invested in bonds guaranteed by the government.

The Trustees invest Social Security surplus by buying special Treasury Bonds that are earning interest in the trust funds. When claimants need to use them or it reaches maturity, the treasury bonds can be cashed. These bonds are not only safe; it also earns approximately 7 percent in annual interest.