Understanding the Social Security Trust Fund
It is generally accepted that longer life expectancies and the gradual retirement of the baby boomer generation are combining to raise questions as to the sustainability of current levels of Social Security distributions beyond 2034.
The Social Security Administration collects payroll taxes and uses the money collected to pay Old-Age, Survivors, and Disability Insurance benefits by way of trust funds. Currently, these trust funds have nearly $3 trillion in reserves but are expected to completely run out of money by 2034, as expected payouts are projected to exceed receipts over the next 16 years.
There are several potential ways to fix the program, but most of the discussions fall into two main categories-raising taxes or curtailing benefits. Democrats generally favor tax increases, while Republicans tend to propose cutting benefits, to high-income retirees, among others.
It would seem that there is another, and potentially a far better solution-increase employment. In the simplest of terms, Social Security payments to retirees are funded by taxes on the employed. If we increase employment, the Social Security trusts will immediately begin to receive more money. Considering that unemployment is near record lows and demand for workers is at record highs, increasing the workforce ought to be feasible.
Increasing the work force can be accomplished quickly by encouraging more people to go to work. With current work force participation at record lows, this could work. Increasing the current historically low birth rate would also be constructive, but may be difficult to achieve and, even if successful, would take years to have a positive effect. The third, and the solution with the most potential, is to reach a politically acceptable approach to an orderly increase in immigration.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA