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Social Security Reaches Deficit   August 5th, 2010
It's been coming, and now it's here...       

 
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It's been anticipated for years, but now it's here: Seven years earlier than originally anticipated, Social Security will now pay out more in benefits than it takes in in taxes. This only worsens the Federal Government's deficit, and increases the public debt.

It's official: Social Security will reach its tipping point this year.

For the first time in nearly 30 years, the system will pay out more benefits than it receives in payroll taxes both this year and next...

The trustees report also said the Social Security trust fund will be exhausted by 2037 -- its same prediction made last year.

The fund is a $2.5 trillion surplus that workers and employers started paying into the system after Social Security was reformed in 1983. It becomes "exhausted" when it reaches a point when only 76% of benefits can be paid out.


Here's the problem: There is no trust fund. There is no bank account with $2.5 trillion dollars in surplus funds that have been saved over 27 years. It's already been spent. All of it.

This is the reason why the Clinton "surplus" was a myth.

For years we've been paying more money into Social Security than was needed to pay current-year benefits. That would have made sense if the surplus money had been set aside so that, now, Social Security could start using that saved-up money to pay for its shortfall.

Unfortunately, Social Security loaned the surplus money to the Federal Government, was issued IOU's, and the Federal Government spent the money on whatever Congress was spending money on that year. Congress was able to spend more money without raising taxes.

This year Social Security will take in less money in taxes than it's paying in benefits. It's going to come up short, so it's going to need to cash in some of those IOU's to make up the difference. It'll present those IOU's to the Federal Government and say, "We need our money back."

But the Federal Government doesn't have any money to give back to Social Security. The Federal Government doesn't even have enough money for its own operation, hence the $1.5 trillion annual deficits. That means the Federal Government is already borrowing $1.5 trillion each year just to operate. And now Social Security is going to inconveniently ask the Federal Government to actually pay back money it owes.

Since the Federal Government doesn't have the money, it will have to borrow more money from the public so that it can pay back the money it owes to Social Security. It's going to make one credit card payment (to Social Security) by charging it to another credit card (the public debt).

Although the CNN article, and many others, focus on the year 2037 as when the "trust fund" is supposedly going to be exhausted, the reality is that it already is. There is no money in the trust fund. Every dollar that Social Security comes up short this year (and in years to come) will have to be paid by the Federal Government out of the general fund.

This is the reverse of what's been happening for decades. Instead of Social Security running a surplus and boosting the Federal Government's general fund with extra money, Social Security will now be running a deficit and acting as a drain on the government's general fund.

This is probably, in part, why there is increasing speculation that there will be a lame-duck session of Congress to pass tax hikes (perhaps disguised as changes to Social Security "contributions" or changes to retirement age) after the November election, when Democrats have nothing left to lose.

President Obama has said in the past that fixing Social Security is "simple." But, as always seems to be the case with Democrats, the "simple" solution will almost definitely be raising taxes. Which will solve the problem until such time as they decide they need to raise taxes again... and again... and again...

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