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The Boeing Company (BA), General Electric Company (GE), Ford Motor Company (F): Why the Social Security Trustees Report Is Meaningless

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Every year, the trustees of the Social Security Trust Fund give their report assessing the health of Social Security. Every year, the report draws a line in the sand beyond which retirees and other Social Security recipients will no longer receive full benefits, raising a big debate about what steps the government should take in order to shore up the program on which millions of retirees rely for the bulk of their income in their old age.

The Boeing Company (NYSE:BA)

Yet behind all the assumptions and actuarial projections contained within the report, one glaring omission makes its conclusions essentially meaningless: the failure to consider political reality. Given the inability of decision-makers in the government to reach compromise until the last possible minute, the only thing the Social Security Trustees report really tells us is that 2033 will be the year in which Congress and whoever the president happens to be will have to begin negotiations to avoid what might eventually be dubbed the “Social Security cliff.”

Social Security Administration Building, Washington, D.C. Source: Wikimedia Commons.

What the report says
This year’s report makes its usual set of ominous projections. According to its analysis, the deficit between Social Security payroll tax revenue and benefits paid will keep rising, and by 2020, the interest on the Treasury bonds held in the Trust Fund will no longer be sufficient to cover that deficit. That in turn will force the Trust Fund to start redeeming bonds, and by 2033, the Trustees project that the Social Security Trust Fund will be empty.

At that point, the program would have tough choices. With no increase in taxes, the program’s revenue would be enough to pay about 75% of benefits. Alternatively, to sustain benefit levels, withholding taxes would have to rise from their current level of 12.4% — split equally between employer and employee — to about 16.5%. The other option would be for the government to agree to changes in benefits that would reduce the program’s overall cost, such as increasing the retirement age, making changes to inflation adjustments on benefits, or adding restrictions like means-testing to the benefit calculation.

A dose of reality
When you consider the track record of dealing with major changes in the laws that have the most financial impact on Americans, the government doesn’t fare all that well. Back in 2010, when tax cuts enacted in the early 2000s were set to expire, Congress and the president agreed to extend the provisions for another two years without really addressing the substantive issues of keeping the cuts versus letting them expire.

Then, the debt-ceiling debate arose in 2011. Lawmakers took the nation to the brink of default before finally coming to a compromise, and that inspired ratings agency Standard & Poor’s to downgrade the former AAA credit rating of U.S. Treasury obligations. S&P specifically referred to the government’s inability to put together enough of a deficit-reduction package to satisfy the ratings agency.

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