For the past several years, Social Security's Trustees have been reporting on the accelerating depletion of that program's Trust Fund. As recently as 2008, the Trust Fund's doomsday was projected to be as far away as 2041. But over the past several years that collapse date has inched forward and now sits at 2033.
Unfortunately, even that projection looks like it's a bit too optimistic. It turns out that there's a very real risk that next year's report will move that date even closer.
Since the Trustee's Report was written in April, some news has emerged about the investments in the Trust Fund putting a drag on the returns.
Every year, Social Security rolls over its maturing long-term Treasury bond holdings, picking up new ones to replace the ones that are expiring. Because of exceptionally low interest rates, Social Security is earning less interest on its new bonds than it did on its old ones.
That lower interest, along with the fact that the program now takes in less in taxes than it spends in benefits, means the Trust Fund is on even shakier footing.
What's a Few Billion Among Friends?
Take a look at the scary trend line that shows the annual interest lost when the old long-term bonds matured or were sold versus the annual interest on the new long-term bonds:
Every year since 2010, the new long-term bonds being bought by Social Security pay substantially less interest than the old long-term bonds that are maturing. That red line is getting deeper, and the 2012 total is nearly $5.4 billion in annual interest foregone because the new bonds pay that much less than the old ones.
That amounts to $5.4 billion less available for paying benefits or for reinvestment. That's a $5.4 billion deeper hole the program faces next year than it would have if rates had stayed steady.
And that's just from one year.
Since 2010, the total annual income foregone due to lower interest rates has exceeded $10.5 billion. Since this only counts the long-term bonds that Social Security is using -- not the short-term certificates that get traded much more frequently -- those numbers add up to create a whole world of pain.
It's a huge deal, because Social Security is already paying out more in benefits than it takes in as taxes. The only reason the Trust Fund is still growing at all is because of the interest it generates on the Treasury bonds it holds.
With interest rates so low and net interest received dropping as a those old bonds mature, that "net interest" kicker is rapidly losing steam. The sooner it runs out of gas, the sooner the Trust Fund starts actively shrinking, starting something of a death spiral as the stockpile depletes.
From the perspective of a potential recipient, this hastens the need for you to prepare for the Trust Fund's collapse. Every downward revision in the year the Trust Fund will expire hurts your chances to get ready in two ways. For one, the closer date gives you that much less time to prepare. For another, if you aren't already preparing, then you've already lost the time that had passed since the last revision.
In other words, assume for the sake of discussion that the 2013 Trustees' Report moves the Trust Fund's anticipated run-dry date a year closer -- to 2032 rather than today's expected 2033. If you did nothing to prepare in 2012 because you had 21 years before the issue struck, imagine waking up when the next report is published to find that you've lost not one year, but two.
What Will You Do About It?
Think it can't happen? Take a look at the table in this article along with the graph above in the one you're reading now. Ask yourself what's more likely: that the ugly trend that has already established itself will continue, or that these very serious issues will somehow, almost magically, solve themselves.
With around two decades left, you still have time to prepare. But your chance to let time and the magic of compounding work for you to cover for Social Security's shortfall is rapidly running out. So get moving now, or prepare for a really scary income gap when you are looking to retire.
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