Today’s quiz: Which part of our government has banked enough money to pay its bills for more than three years?
Yes, believe it or not, part of our government has actually done that: put aside enough money to cover its expected spending that far in advance. It’s called Social Security.
The information comes from a table in last year’s Trustees Report. It shows the history of the combined Social Security and disability income trust funds since 1937. At the end of 2011 the combined trust fund had enough assets to cover payments for 3.54 years.
It wasn’t always this way.
The same table tells us that in 1983, the year before the Greenspan Commission Social Security reforms took effect, the fund had assets to cover only 0.14 years. That’s less than two months of benefit payments — less than the amount regular people are supposed to have as an emergency fund.
Since then, every working stiff with a paycheck has been paying extra money to build the trust fund. While we paid in only an extra 2 cents for every dollar that was spent in 1984, the extra pennies quickly climbed. They reached an extra 18 cents for every dollar spent in 1990, then receded a bit. The extra payments peaked at an extra 21 cents for every dollar spent on benefits in 2000.
While the employment tax was constant during this period, the surplus over benefits paid out varied from year to year.
Only in 2010 and 2011 did costs exceed our employment tax payments, due to the combined effects of recession and the 2-percentage point cut in the employment tax. On average, we paid an extra 11 cents for every dollar spent on benefits over the entire period.
When you add all those extra dollars we put in and all the interest they earned, you get a combined Social Security and disability trust fund with nearly $2.7 trillion in assets — enough to cover last year’s payments for 3.54 years.
During the same period, the rest of our government wasn’t doing so well. While Social Security had a surplus in all but two years, the “on budget” — which includes most government operations except Social Security — had a deficit in all but two years. While Social Security was collecting $1.11 on average for every dollar paid out, the rest of our government was collecting only 77 cents, on average, for every dollar paid out. In 2011 it collected only 56 cents for every dollar paid out.
That’s why the publicly held Treasury debt grew from only $1.3 trillion in 1984 to $10.1 trillion in 2011 and a stunning $12.6 trillion today.
That $12.6 trillion in public debt (which includes the money we owe China and other nations) would be still higher if all that extra money we paid in hadn’t been used to pay for other government spending. But it was, and we have the trust fund IOUs to show for it.
And that’s also where this becomes a big-time problem, a problem that is a lot more serious for young workers than older workers or retirees.
The same Trustees Report contains estimates for future revenues and costs.
For 2013, the trustees estimate that benefit payments will exceed actual cash revenue — the money received in employment taxes and from taxes on benefits. More important, they estimate that benefit payments will exceed actual cash revenue in every year in the future.
So here’s the problem: The trust fund has $2.7 trillion in U.S. Treasury obligations — lots of assets. But those assets aren’t cash. Benefits have to be paid with cash.
What does all this mean? Simple. The same program that has been a cash cow for government overspending since 1984 is now turning into a cash hog. It will be competing with other programs for a limited supply of revenue.
Whether the weasels in Washington increase the employment tax, increase the amount of income that can be taxed or change the method for calculating future benefits, its true purpose will be to increase cash in and decrease cash out.
It’s all about cash flow. It’s not about the IOUs our officials call assets.
SCOTT BURNS is a principal of the Plano-based investment firm AssetBuilder Inc.
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