Can Social Security Really Go Bankrupt?

Technically no, but Cuts in Retirement Benefits Likely

Can Social Security Really Go Bankrupt?
May 1, 2017

According to some angry Americans, Social Security is going bankrupt. Is it? Or are voters subject to an emotionally driven hyperbole?

The question is one of the more contentious arguments within the discussion of Social Security. Oddly enough, both sides of the discussion offer some truth. The reason for that is the answer is as much linguistic as it is financial.

Experts generally agree that the program will be unable to pay full benefits in the future, but disagree on the size and timing of the reductions. The consensus says that benefit levels will drop between 20 and 30 percent in a 12- to 17-year timeframe.

One set of Americans believe – very loudly – that possibility means that Social Security is going bankrupt. Another set of equally vocal supporters assures us that Social Security isn't and can't go broke.

Neither side will like my answer.

As an adjective, bankrupt means a person or organization that is declared in law unable to pay outstanding debts.

In a technical sense, Social Security cannot ever be bankrupt because the system automatically lowers benefits to the level of revenue that the system collects in a time of resource shortfall.

If Social Security benefits were a debt, the program would be going insolvent. If Social Security could be taken to court by creditors, Social Security would be going bankrupt.

As it is, the overhang of uncertainty surrounding its future is simply a feature of the system. The Supreme Court has already ruled that Social Security benefits aren't a debt. Monthly checks are exactly what Congress authorizes. In the past, Congress has expanded benefits and reduced benefits.

If benefit reductions by themselves really implied bankruptcy, critics would argue that Social Security went bankrupt 40 years ago in 1977. The program also went into that theoretical bankruptcy in 1983 with benefit reductions of 24%. Last year, people entering retirement lost benefits when Congress phased-out some claiming rights for spouses. The sad fact is that we have no idea how the Social Security Administration would allocate the reduction of any amount in the future. That process is not defined yet, and the fact is that some Americans may get zero. Even in that extreme case, Social Security will, in the words of Senator Bernie Sanders, pay every nickel owed to every eligible American – on time and without delay.

While that scenario may seem like bad news, the worse news is that voters seem satisfied with that feature of the system. In the past election, we nominated for president the two candidates who said the least about the program's finances in the primaries. Neither offered a plausible answer to the one question about the program that the campaign generated.

While Hillary Clinton said that she had repeatedly supported higher taxes on the rich to make the program whole, her own campaign staff could not find in her economic plan even a penny of the incremental $12 trillion necessary to balance the system's finances. While Trump claimed equally forcefully over his own campaign that he wouldn't change the program, he has yet to defend the program to his own appointees.

In a practical sense, people see the promised benefits as a debt owed to them for a lifetime of contributions. FDR wanted this sense of ownership in benefits. He said the contributions were necessary to give workers a legal, moral, and political right to benefits.

So what happened between the time that FDR designed a system to insure benefits, and 1960, when the Supreme Court established the principle that Social Security benefits are not a contractual right? Over the 1940s and 1950s, Congress changed the structure of the program to a pay-as-you-go system. Instead of benefits being paid out of contributions made over the lifetime of the retiree, the system uses today's contributions to pay the benefits of today's retirees.

As a result, someone turning 69 today on average has a degree of uncertainty about their future. These people expect to be alive in 17 years, which is about the most optimistic outlook on the program's ability to deliver scheduled benefits.

Whether we call it bankrupt or insolvent or a feature of the system, the possibility that benefits will be reduced by 20% to 30% is growing for an increasing number of seniors. It is time to stop arguing about what to call the event, and start looking at ways to mitigate its impact.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.


Photo ©iStockphoto.com/YinYang

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