Quite a few millennials are doubtful that Social Security will be there to help them. In fact, the Transamerica Center for Retirement Studies reports in their “15th Annual Retirement Survey” that a whopping 81% of millennials surveyed doubt that Social Security will exist by the time they retire. Are they right?
The Social Security Trust Fund certainly has funding issues just from the demographics of a surge of retiring baby boomers. According to the trustees’ report in July 2014, reserves are projected to be exhausted in 2033, at which point the payroll tax is the only source for paying Social Security benefits. The trustees then estimate that payroll taxes could cover 75% of the expected benefits for the next 55 years.
That doesn’t sound too bad. So why do gloom and doom stories proliferate?
The answer has less to do with economics than politics. There are two different, yet overlapping issues with Social Security’s shortfall – a demographic shift and the borrowing/non-repayment of the existing funds. Both can be addressed through relatively small changes in benefits and/or taxes, especially if changes are made soon.
Let’s address the contents of the trust fund first. People have talked about Congress raiding Social Security, as if members of Congress sneak over to a secret vault on a daily basis and carry off $100 bills in oversized cartoon bags adorned with large dollar signs. As great as a visual as that is, it is not accurate… entirely.
The Social Security Trust Fund is a real entity, containing assets. These assets are not simply a big pile of cash, but instead the fund contains 15-year government bonds that allow the account to accrue interest (remember, Social Security does not invest in the stock market). The bonds can effectively be redeemed from the Treasury at any time to pay obligations.
Unfortunately, the government has borrowed off of these funds, and has not repaid them. Last year the government owed the Social Security system approximately 2.7 trillion dollars. Another way to write that would be $2,700,000,000,000!
Thus, we get to the seemingly opposite arguments that Social Security is “self–funded” (true) yet that without raising the debt ceiling, Social Security checks may not be cut (also true…sort of). Remember the debt ceiling arguments from 2011?
That’s why the debt and debt ceiling argument matters, because the Treasury effectively has to borrow to redeem the bonds and repay the Social Security obligations that have already been borrowed (and spent) – which they cannot do if they are up against the debt ceiling.
Consider this: if the Social Security Trust Fund were invested in the stock market, the trust fund would be subject to the usual ups and downs of the market – but as it would be invested privately instead of in government bonds, the government would not have access to borrow it. We must ask ourselves which represents the longest-term risk.
One positive takeaway is that since millennials do not expect to receive any Social Security benefits – a fear we can see is wildly exaggerated — they are saving at a better rate than earlier generations. The same Transamerica study showed that 70% of millennials have begun saving for retirement, and 66% of those expect to self-fund their retirement.
Millennials, as well as the rest of us, can also help keep Social Security solvent by encouraging our leaders to keep debt and government spending at responsible levels. Spending is not inherently bad, but it needs to be the right type of spending. We must receive some tangible return for our investment.
In summary, will Social Security be there for millennials? Almost certainly it will, but benefit levels may need to be reduced compared to those received by current beneficiaries The better questions are: what are the most effective remedies to keep Social Security solvent, and can our leaders put aside partisan bickering to address this great — but still manageable — challenge?