While going through the 2016 Annual Report for Social Security and Medicare, I stumbled across the main theme that Social Security will have to start drawing from their “excess reserves”. Here’s a short snippet from the report and I’ll explain what “excess reserves” are….
After 2019, interest income and redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual deficits until 2034, when the reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2090. The ratio of reserves to one year’s projected cost (the combined trust fund ratio) peaked in 2008, declined through 2015, and is expected to decline steadily until the trust funds are depleted in 2034.
So what are “asset reserves”? They are IOU’s from the government since they have borrowed from actual surpluses of tax revenue that has come in for Social Security from the payroll tax. The IOU’s are Treasury Notes or “bonds”. So each month when SS would report a surplus, the federal government would borrow that money to spend it elsewhere. The government is broke as many have noticed the last twenty years and runs huge budget deficits yearly. When SS starts knocking on the door of the Treasury to redeem some of these bonds only two things can happen 1) Treasury says we don’t have the money or 2) We have the money but will borrow which will probably lead to the Federal Reserve printing more money to pay for it. You can also forget about the interest income. Because if the Treasury doesn’t have money for the bonds, they won’t have it for any supposed interest accrued.
Either way, it will be a mini financial disaster for higher interest rates the government will have to pay to borrow money or just an outright 25% cut like they now forecast for 2034, but just in 2019.