Social Security and the Federal Debt: Why You Should Be Worried

Last Updated Aug 17, 2010 5:56 PM EDT

Last week, I was interviewed on NPR's Talk of the Nation show. The title of the show was The Hole in the Social Security Net . NPR host Neal Conan started the show by bringing two things to our attention:
  1. Social Security is now 75 years old, and
  2. For the first time in many years, the benefits paid by Social Security exceed the Social Security taxes paid into the system.
Max Richtman, Executive Vice President of the National Committee to Preserve Social Security and Medicare, was also interviewed on the show. His opinion is that there is no funding problem with Social Security. Yes, it's true that Social Security taxes no longer cover the Social Security benefit payments, he said, but that's primarily due to high unemployment: We have fewer workers paying Social Security taxes compared to a few years ago when unemployment was much lower.

Not to worry, however, because there's a Social Security trust fund with $2.5 trillion in assets (as of year-end 2009) that are in reserve to pay Social Security benefits. And these assets are invested in the safest possible investment -- U.S. government bonds.

But the fact of the matter is, I am worried, and I have to respectfully disagree with Mr. Richtman. Somebody has to pay back the interest and principal on these government bonds, and who will that be? You guessed it -- that's us, through our taxes. Another way to express the value of the Social Security trust fund is that it's invested in $2.5 trillion of future tax collections. Now I don't feel so secure.

Actually, future tax collections will need to pay for much more -- the total U.S. government debt is $13.3 trillion and counting. This consists of $8.6 trillion owed to individuals, corporations, state and local governments, pension trusts, etc., and $4.5 trillion in "intragovernment debt." Intragovernment debt is U.S. government bonds that are held by an agency of the U.S. government, and the Social Security trust fund is the largest holder of those bonds. Basically, one hand of the government owes the other hand.

The total U.S. government debt amounts to more than $174,000 per citizen, and more than $665,000 per family. And if you've read the headlines lately, you can guess that it's not getting any smaller. Our future taxes will need to pay for each year's government operations and for the interest on the federal debt. This last item alone is almost $200 billion of the annual federal budget and growing.

Mr. Richtman said that the U.S. government debt is safe -- after all, if the government reneges on the debt, we've got much larger problems than just Social Security. That's exactly my point, though -- if we don't fix Social Security and the growing federal deficit, we'll have very large problems to deal with, including Social Security.
I think Social Security is a great program, and I said so in my interview. I also offered common-sense advice for getting the most from your Social Security benefits, as I've written about previously.

Social Security is the foundation of security for millions of retirees. I want to preserve Social Security, so it will be there for me, for you, for my children, and for my grandchildren. And that's why I feel very strongly that we need to fix Social Security.

People who want to fix Social Security have been portrayed as wanting to destroy the system. But nothing could be further from the truth. It will take some combination of modest trims to Social Security benefits and modest increases in Social Security taxes to fix the problem. As taxpayers, we need to support our leaders to make these changes.

There are a lot of great proposals out there -- among others, my CBS MoneyWatch colleagues Eric Schurenberg and Carla Fried have previously written about some of them. My favorite? I don't have one. I just want our leaders to fix the problems, and I'm sure they'll select workable solutions from the many good proposals.

Only financially strong nations can afford to have a large part of the population be "not working" or retired. We need to stay financially strong so that eventually we can all retire. The first step is to admit there's a problem and vow to fix it. Supporting our leaders in this effort is an important part of our retirement planning.

By the way, here's the link to the NPR show. It's about 30 minutes long, and my interview starts about 13 minutes into the show.

Image from iStockphoto contributor jhorrocks.
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.