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Social Security: A Promise that can be Fixed

Published by: Chad L. Starliper, CFP® Date: April 29, 2012

I recently was asked to write a time capsule letter for my five year-old cousin Maggie that she is to open on her eighteenth birthday. This opportunity got me thinking about all the things that might change by the time it’s opened in 2025. Based on the news this week, it seems one of those things that could change may be Social Security.

In its recently released annual report to Congress, the Social Security Board of Trustees warned that the program’s Trust Funds “will be exhausted in 2033, three years sooner than projected last year.” While benefits would not stop entirely, the report projects that income from collected payroll taxes alone would only be sufficient to “pay about 75 percent of scheduled benefits.”

This of course prompted some gloom and doom from the national pundits. A quick Google news search returned over 570,000 articles on the subject, with most headlines sounding negatively sensational. One example was a PBS newscast titled, “Social Security Slated to Run Dry in 2033.” That sounds really bad, but is it true?

This kind of talk only serves to scare people and confuse the issue. Social Security benefits are just a promise made by the federal government to pay, much like their other spending programs. If benefits are changed it will happen because Congress decided to change them, not because the Trust Fund is insolvent.

Consider a family using the envelope system to budget their finances. They have ten envelopes for each spending category, and in one envelope is money for haircuts. The family agrees that it will only spend on haircuts to the extent that there is money in the envelope. However, that constraint can be lifted at any time. Should the Haircut Trust Fund run dry, the family will have to either increase the budget for the haircut envelope and perhaps reduce spending on other things, or spend less on haircuts. Either way, it is a choice they will make based on their spending priorities.

In the same way, the Congressional Budget Office will confirm that the Social Security Administration cannot technically issue checks unless there are assets in the Trust Fund. OK – but Congress can always put more money in the Trust Fund. In fact, just last year they added $103 billion from “other envelopes.” So much for that problem! Social Security is just a promise to pay. Over the next twenty years, Congress could, and probably will, change the system in some way we cannot predict today.

I think I will tell my cousin to worry about the things that matter and those that she can control. She can control her personal and financial decisions; she can create her own security through saving; and she can educate herself about money. What she can’t control is the future promises of others.

Chad Starliper, CFP® is a Senior Financial Advisor with Rather & Kittrell. He is available at cstarliper@rkcapital.com