Despite these intensifying annual warnings, lawmakers have not acted.  One reason they have not is the presence of an accounting phenomenon known as the Social Security trust funds.  The assets held by these combined trust funds appear massive ($2.9 trillion in the latest report) while the projected date of their depletion seems to be distant (2034).  The apparent remoteness of doomsday has signaled, to the uninformed, that there is still plenty of time for elected officials to fix the problem before it becomes an urgent crisis.  This is very wrong.  The crisis is now.

This is from Charles Blahous, “Social Security’s Downward Spiral,” Defining Ideas, August 23, 2018.

Blahous is a visiting fellow at the Hoover Institution.

The whole piece is well worth reading. Two things in particular are worth watching for: (1) his analysis of the so-called Social Security Trust Fund, and (2) his laying out of the cuts that would be required to keep Social Security operating for the next 75 years.

On (1), he writes:

Let’s back up for a moment to explain the trust funds and their significance to Social Security financing.  In the past, whenever Social Security ran a surplus of taxes over expenditures, federal treasury bonds were issued in that surplus amount to its trust funds, which the program could later draw upon for future spending authority.  These bonds earn interest, which is paid from the federal government’s general fund.  As long as there are assets in these trust funds, benefit checks can continue to be sent out – even after incoming payroll taxes become insufficient by themselves to finance the payments.  Indeed, that tax shortfall emerged in 2010 and has been worsening ever since, yet the Social Security trust funds’ holdings have continued to grow due to increasing payments of interest from the general fund.


In 2005, I gave a talk at Santa Clara University titled “Social Security: The Nightmare in Your Future.” My daughter, Karen, was attending SCU at the time and attended my talk and I had her permission to tell this story. Here is, from memory, what I said.

When Karen was about 11, she asked me if I had started saving for her to go to college. I answered that I had just started doing that. “How much will you have saved by the time I’m 18?” she asked. [That numerate acorn did not fall far from the tree. Her question got a laugh from the audience.] “About $80,000,” I answered. My plan was to save about $10,000 a year for 8 years. It wasn’t that smooth, but by the time she was 18, we had saved a little over $80,000. But what if, instead, I had, each year, written on a piece of paper, “IOU $10,000” and put the piece of paper in a jar that I safely tucked away? Then, when it came time to pay her tuition, I poured out the 8 IOUs. What would I have? Nothing. That, ladies and gentlemen, is the equivalent of the Social Security Trust Fund. It’s a bunch of IOUs saying that the U.S. Treasury owes the trust fund a lot of money.

On (2), Blahous writes:

Some illustrations from recent trustees’ reports may help to clarify the situation.  Closing Social Security’s shortfall over the next 75 years (far less than a permanent fix) would require savings equal to 17 percent of its scheduled expenditures if enacted today.  Obviously, lawmakers have never and will never indiscriminately cut benefits 17 percent across the board, which would hit today’s poor 90-year-old widow as hard as someone who won’t retire for 40 years.  Assuming instead that lawmakers only change benefits for those yet to retire, the size of the required cuts rises to 21%.  But again, that severely understates the adjustments required, for we are not about to cut benefits 21% for everyone, rich and poor, who retires next year.  Changes would undoubtedly be phased in more gradually, and thus would need to hit future retirees far harder.


If this doesn’t sound difficult enough, consider what happens if we wait until 2034, the projected depletion date for the combined Social Security trust funds.  By that point, even total elimination of all benefits for the newly-retiring would be insufficient to maintain solvency.  For all practical intents and purposes, the shortfall by then will have grown too large to correct.

A few years ago, when I knew I would retire soon and was trying to figure out when to start collecting Social Security, I knew that with the Social Security earnings penalty, I should wait until age 66. But should I wait longer? Every year you wait past age 66 up to age 70, your annual benefit rises by 8%, non-compounded. So, in the limit, if I waited until age 70, my benefit would be 32% higher than if I started getting SS benefits at age 66. Figuring out what to do is not hard, once you estimate your life expectancy and use a reasonable interest rate to discount benefits. (Incidentally, as I documented here, one of the most sophisticated financial firms in the business, Vanguard, did the calculation by assuming a zero interest rate.) But just to make sure, I paid $40 to economist Laurence Kotlikoff for his estimate. I’m guessing Larry has become a multi-millionaire with his software and good for him. I wasn’t at all surprised when his software spit out the answer that I should wait until age 70. (By the way, Larry wrote two excellent pieces for The Concise Encyclopedia of Economics, titled “Saving” and “Fiscal Sustainability.”)

But all such estimates are based on assumptions. One key assumption in Larry’s model is that the rules for Social Security won’t change. I think they will. I think that sometime in the next 15 years, and maybe even in the next 10, Congress will rein in benefits for “the wealthy” and Congress will see me, by looking either at my net worth or, more likely, at my income, as one of “the wealthy.” I’m not saying Congress would be wrong. I think of myself as wealthy.

So I split the difference, not in half  but in quarters. I started taking Social Security at age 67. But I’m allocating my other retirement savings as if my SS benefit 10 to 15 years from now will be 30% lower than promised.