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5 Things To Know About The 2012 Social Security Trust Fund Report

In April, the Social Security Board of Trustees released a dismal report which Michael J. Astrue, Commissioner of Social Security, described as troubling. The media compressed the report into a byline: "Social Security Shortens Timeline For Trust Fund By 3 Years". The public further shortened the hundreds of pages of report into 4 digits : 2033.

Many younger Americans dismiss the report because they believe that the Social Security system will not be there for them. It is a mistake to ignore the deterioration of the system because the consequences of a crisis in Social Security will be there for all Americans. This is what the report means to you.

First, the financial picture worsened over the past year. The unfunded liability grew by more than 14% to 20.5 trillion in 2012 dollars. That figure is more than Social Security has collected in all forms of revenue from all Americans since its inception.

Second, the demographics of Social Security also deteriorated. With the latest report, the Trustees have projected that anyone who is 46 or younger will retire after the Trust Fund is gone. Anyone who is 63 can expect to live long enough to lose benefits. Based on 2010 data from the US Census, that means that only 22% of voting-aged Americans can expect to be unaffected by the deteriorating financial picture in Social Security.

Third, the government expanded the public subsidies of the system in 2011. The Federal government has subsidized the Social Security system with dollar-for-dollar deficit spending since the mid-1970s when it introduced the Earned Income Tax Credit. The level of subsidy was expanded in 2011 to include $103 billion in payroll tax-holiday funding. This change expands the revenue reach of the system from the capped-wages of covered workers to all future income streams of all Americans. This is really bad news for younger Americans. The system may not be there for them but the debt created by the subsidies will be.

Fourth, the system no longer generates enough to cover scheduled benefits. In 2012, Social Security used interest from the Trust Fund to cover the shortfall. This process has long-term consequences for the Federal government which has enjoyed the benefit of the excess cash flow to finance the debt. These longterm consequences are very bad news for younger Americans who will have to support the increased cost of the nation's debt as the government moves financing from trapped capital to the public markets.

Fifth, many pundits will make misleading statements about what the Trustees have said by suggesting that Social Security will take in enough revenue to keep all of its promises for the next 30 years, without any changes at all. The Trustees projections are based on a good economy. The pundits leave off the conditional clause, "if the assumptions are right".

Some of these assumptions are pure fantasy. The Trustees, for example, silo the system from known external events like the collapse of Medicare. The Trustees present these two programs as separate entities. While they may be separate legal entities, they draw financial resources from the same tax base just like two straws drinking from one soda. What one takes the other cannot. If Medicare reaches insolvency in 2024 as the Trustees have separately said, Congress will have 3 choices:

Divert some of the payroll taxes away from Old-Age Insurance to Medicare

Divert general taxes away from debt control

Redefine Medicare benefits

Younger Americans should pay very close attention to another assumption built into the 2033 equation. Once the Trust Fund is exhausted, benefits will be cut by a projected 25%. While younger Americans may not be directly affected by the forced benefit reductions, they will be indirectly affected as their parent's benefits are cut. So the Trustees are assuming that future workers will contribute as much in payroll taxes as today, despite increased parental support and increased costs to manage the debt. This assumption is no more realistic than projecting that leprechauns will spit out gold coins to pay for the system.

Many younger Americans ignore Social Security because they think that they will get nothing. They are wrong. The one thing that I can assure everyone is that they will get something. It may make you wish for nothing - but all Americans will get something from a collapse of Social Security.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I work with FixSSNow.Org, one-stop shopping for people interested in Social Security reform