One of the urban myths that will not die contends that the reason the Social Security Trust Fund is projected to run out of money in about sixteen years is because politicians have been stealing from it and never paid back the money they took. That is 100 percent false. The government borrows money from the Trust Fund from time to time, but as a loan backed by interest bearing U.S. Government Bonds and the loans always get paid back with interest. Imagining this is “stealing” would be like saying that when the bank at which you have a savings account makes a loan, that the bank is stealing your deposit if it is lent out. With both Social Security and the bank there is more money at the end of the day due to the interest earned on the loan. This is clearly shown in the Social Security Report published each year.
However, there is a $27 trillion shortfall in the Social Security trust account. Who took the money? Your parents and grandparents. Those that were born before 1932 were overpaid $29 trillion in benefits. Simply put, Social Security paid out far more in benefits than these workers ever paid in. The biggest winners were those born in 1910—in present value terms, based on what they paid in, they should have received benefits worth $180 billion but received $1.097 trillion; an overpayment of over $900 billion. Many of the “notch babies” (those born between 1917 and 1926) complained for years that they felt they had been underpaid and cheated because they got less than those born earlier, but the reality is this group received over $6 trillion more in benefits than they should have received based on their contributions.
Due to changes in Social Security in the 1980s, those born after 1931 have paid down $2 trillion of the original $29 trillion shortage—with baby boomers paying in the most—leaving the current deficit of $27 trillion. But it isn’t enough. If nothing is done, benefits will need to be cut permanently by 20 percent in 16 years (the $1500 monthly check you were collecting goes to $1200).
There are a couple ways to maintain current benefit levels. The most obvious is to increase the Social Security tax on workers by around 1.5 percent (no income cap on contributions) to 1.75 percent (keep income cap on contributions) on each of the employer and employee sides. The other alternative is to keep FICA where it is, but add a two percent surtax on the income tax rates. Neither of these solutions do much to reduce the $27 trillion hole; they simply keep benefits from being cut.
How did it come to this? Voters tend to kick people out of office when they hear the words “tax increase” so the Social Security “can” kept getting kicked down the road. However, the reality is America is at the point where it either increases Social Security taxes today or jeopardizes the retirement of millions of Americans—beginning in less than 20 years.
Reference:
http://crr.bc.edu/working-papers/how-to-pay-for-social-securitys-missing-trust-fund/
