A Generation Empowered

A Generation Empowered's Analysis of the 2015 Social Security Administration's Annual Report and what it means to the Millennial Generation.

2015 Trustees Report on the Social Security Trust Fund

Each year the Trustees of the Social Security and Medicare Trust Fund release a report on the status of the funds. No sooner was this year's report released than did the Huffington Post publish an article with the title "2015 Trustees Report of Social Security Confirms that Expanding Social Security is Fully Affordable". You can read the full article here. The article attempts to dispute concerns that the Social Security Trust Fund is on a path to insolvency to put forth a broader argument for expanding Social Security benefits. 

An expansion of benefits is, in fact, needed to provide for a reasonable and adequate standard of living for a generation of retirees, expected to grow to 70 million over the next fifteen years. However, it's imperative that we also have a clear understanding of just where Social Security now stands, where it's headed and what its sustainability may be for future generations. Moreover, as the article and Trustee report both point out, the urgent and imminent demise of the Disability Insurance portion of the Trust Fund (i.e., 2016) is a cause for great concern. How to address DI's insolvency, however, is the subject of much controversy.

Despite the thrust of the Huffington Post article, the actual 2015 Summary of the Social Security Trustee's Report clearly states, "Beyond Disability, Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing". This statement, in one of the opening paragraphs of the Trustee report should make it quite clear that there is a very serious problem with the future solvency of the Social Security program. The report goes on to state that, "After 2019, Treasury will redeem trust fund asset reserve until depletion of the total trust fund reserves in 2034". Hard to see how this statement could be misinterpreted, but let's take a closer look at the numbers.

As the Huffington piece correctly points out, while in 2014 the outflows of Social Security benefits and costs exceeded the inflows from payroll and other taxes, the fund balance still grew through the addition of interest income to the fund (an amount that exceeded this net program outflow). Now, you may be curious about the source of this interest income, which is really the subject of a much longer discussion. But basically, the story begins with Congress borrowing annual surpluses from the Social Security Trust Fund, for many years now. 

Social Security Trust Fund surpluses (amassed due to favorable demographics in prior years) have been routinely diverted by Congress to support a broad range of (non-retirement related) budgetary imbalances. In place of the cash extracted, the Treasury has substituted a special class of US Treasury bonds. So much swapping of Treasury bonds has taken place, in fact, that the Social Security Trust Fund is now the world's largest holder of US Treasury bonds, surpassing both China and Japan. This means that in order for the Social Security Trust Fund to meet its 2034 date of insolvency (and continue to pay partial benefits of 75% of scheduled) the US Treasury has to either pay off these bonds through taxes, or find third party sources of capital to refinance the bonds as they come due. Oh, the amount? It's $2.8 trillion, with a "t".

Diverting funds from Social Security now to shore up Disability, as has been proposed, would resolve the immediate crisis of the Disability Insurance portion of the Trust Fund, but it would further compromise the solvency of Social Security. It's borrowing from Peter to pay Paul, something our Congress manages to do with great skill, but something that also simply trades one problem for another. As the Trustees of the Social Security Trust Fund state unequivocally in their report "legislation is needed to address all of Social Security's imbalances...[and]...lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016".

So let's avoid the attempt to mischaracterize the status of Social Security, or to needlessly politicize the discussion along party lines. It's math. And something needs to be done to fix it now. You can read more about what can be done in the blog post below, What's Wrong with Bernie Sanders' Plan on Social Security and How to Fix it, or in my new book Up in Smoke: How the Retirement Crisis Shattered the American Dream.

Puerto Rico, Bankruptcy and a New American Conscience

Greece has stolen the headlines lately, as the European Union and the IMF try to find a solution to the country's mountain of debt and depression like economy. Unfolding on a smaller stage, though, is the looming bond default by the island of Puerto Rico.  A default, restructuring, or "re-profiling" of the Commonwealth's debt holds the potential for significant losses for the holders of the island's $72 billion of US tax-exempt bonds.  And no sooner did the island's Governor, Alejandro García Padilla, publicly declare the debt to be "unpayable" last week , than did the island government fail to make payment on $93.7 million of bonds of its Public Finance Corporation.

Lawmakers in Washington, finally coming to grips with the realization that the Puerto Rico debt crisis is real, hurried a bill into Congress designed to amend the federal Bankruptcy Act, offering a special exception for the island. Puerto Rico, like the many states in the US that are imperiled by looming pension obligations and stagnant revenues, is not authorized to file bankruptcy under current law. Chapter 9 of the Bankruptcy Act limits filing to US cities, counties and special districts. Chapter 9 was the body of law under which the cities of Detroit, Stockton, Vallejo, Central Falls, Harrisburg and San Bernardino recently took refuge, as they attempted to squeeze their way out of contracted and publicly approved municipal debt.

Unlike those cities, however, where the outstanding bonds were largely held by municipal bond insurance companies, banks and large institutions, the massive debt of Puerto Rico is widely held, often directly by individuals. It is also held in varying degrees by an estimated 377 national municipal bond funds of which the public may be invested. When the bonds in question in prior bankruptcies were guaranteed by bond insurers or banks, it was surprisingly easy for public opinion (as well as that of the courts) to be complacent with default. After all, if there were losses, they deserved it. The bondholders were (mistakenly) considered part of the same Wall Street machine that many (also mistakenly) believe caused the Great Recession.

But the challenges with Puerto Rico bonds are far different, at least from a basis of public perception. Different that is, if you or someone in your family is invested in one of those 377 bond funds. An estimated $11 billion of the total Puerto Rico debt is held by these funds. An additional $45 billion is held by individuals directly, mostly Puerto Rico and US mainland residents. Perhaps unaware or unmoved by this subtlety, Chuckie Schumer, the venerable New York Senator, was quick to champion the cause of Puerto Rico bankruptcy, introducing the aforementioned legislation into Congress last week. True to his base, Schumer was likely more focused on the fact that New York is the largest home to people of Puerto Rico descent, outside the island itself. Presidential candidates, Hillary Clinton and Bernie Sanders were also quick to jump on board, not missing the relevance of New York and Florida voters (the next most populated Puerto Rican state) to their political campaigns.

But this is politics. We try not to set the bar too high. More disturbing, though, is popular opinion. If you read the news media and follow the comments on blog posts, it appears most Americans, or at least those frequenting these site, support the idea of allowing Puerto Rico to declare bankruptcy. Let's face it, if the island can't pay, bankruptcy is far less costly to the taxpayer that a bailout.  As to Washington, it presents the potential for votes and no cost. That's the motherlode in politics. But the public, more broadly, appears to support this view as well.  Who cares if bond investors take one between the eyes?  Unless, of course, it's your eyes.

This raises the broader question, though, is America's willingness to change its bankruptcy laws for Puerto Rico an example of our changing social mores?  Is it now ok not to repay one's debts; that is, as long as it's someone else's money that's not being repaid? Has default become the new black?

What's Wrong with Bernie Sanders' Plan on Social Security and How to Fix it

Presidential candidate Bernie Sanders has done an outstanding job of highlighting the current retirement crisis. He's put forth a fairly credible plan for expanding Social Security, currently threatened with insolvency by 2033. The full text of Senator Sanders' plan, as presented to a Senate hearing in 2011, can be found here and in the Senator's Social Security Expansion Act submitted to Congress in 2015.

Senator Sander's plan is now gaining media attention and a loyal following by Social Security advocacy groups. It relies on promoting the continuing availability of Social Security funding, almost exclusively, through lifting the cap on annual wages subject to the FICA payroll tax, (currently $118,000). US Treasury Secretary Jack Lew actually has a plan to divert a greater portion of the existing FICA tax, in order to fund the disability portion of the Social Security Trust Fund, or OASDI (with the disability program expected to reach insolvency by next year).

As the Senator claims, it is true that a vast amount of wage income passes through private incomes that is not subject to the FICA tax. In fact, IRS data for 2012 shows just under 21 million individual tax returns, or 22% of the total taxable returns filed, with adjusted gross incomes greater than $200,000. A total of 392,850 returns filed showed AGI of greater than $1 million. For these individuals, upwards of 90% of their income is exempt from the FICA tax.

But research indicates that removing the cap on wages subject to the payroll tax would only delay the date of insolvency of the Social Security Trust Fund by a few years. Moreover, by 2035, the Trust Fund would still only be able to pay 85% of projected benefits (rather than the 75% that the Social Security Administration currently estimates).

This brings us to the first point about the projected insolvency of Social Security. Many are now arguing, including Senator Sanders, that in 2033, Social Security won't be bankrupt or insolvent, but rather, that the fund will only be able to pay 75% of projected retiree benefits. Sorry folks, but it's the same thing. When a corporation, government or private individual files for bankruptcy it doesn't mean that they have zero in the bank. Rather, it means that the company's debts or payment obligations exceed their assets or ability to pay their liabilities as they come due. The company is thus considered insolvent. Let's not needlessly confuse the issue with semantics.

That being said, the Senator is entirely correct in his premise that something must be done now given the current level of personal retirement savings, the dramatic abandonment of defined benefit pension plans by Corporate America and the fact that 35% of Americans in retirement rely solely upon Social Security for their income. Like it or not, reforming Social Security is the only place for America to take such remedial action.

But here's what Bernie Sanders has left out of his plan. First, in order to achieve long term stability for Social Security in the face of highly unfavorable demographics, we need to delink Social Security from the payroll tax. Americans need to begin to realize that they haven't paid into a pension plan, for which everyone will receive proportionate dividends in their retirement. In other words, Social Security needs to be means tested. There's no reason why the government needs to pay retirement benefits to Bill Gates. He's fairly well prepared for the expenses of retirement.

Second, while lifting the payroll cap is a good start, ultimately Social Security will also need to be delinked from the tax and the idea that the program can be self-funded. Many nations around the world, including Australia, operate pension plans that are general budget items. Australia's Age Pension System has operated this way for many years and is consistently ranked as one of the world's most successful retirement systems. These and other changes to the Senator's plan can and should be made now, to provide an approach that will restore the solvency of Social Security for future generations.

If you'd like to read more about the retirement crisis and the way to solve it, please check out my new book, "Up in Smoke: How the Retirement Crisis Shattered the American Dream", now available on Amazon, iTunes, Barnes and Noble and other ebook retailers.