My company changed retirement plans recently, and I have to give credit where it’s due: It is now much, much easier to track the losses in my 401(k) than it used to be.
Not only can I watch my future slipping away online, I can call a qualified retirement professional toll free, anytime I want, and confirm the bad news. There’s even a handy retirement calculator to help figure out the day on which I will actually be able to stop working. The date is moving away from me with the speed of the girl I took to the junior prom.
Which means, despite my best efforts, I may have to count on Social Security more than I’d planned. Maybe we should take a quick look at our national pension plan and see where we stand, no?
The good news is that the Social Security Trust Fund is still taking in more than it’s giving out and will continue to do so for some time, probably until 2018, according to most estimates. At that time, the fund will have to start cashing in some of the $1.8 trillion in investment bonds it holds so it can keep cutting checks for retirees.
There’s a lot of confusion out there about the trust fund and whether it actually exists or is just a little Inside-the-Beltway joke perpetrated on taxpayers by consecutive administrations stretching back to Kennedy. The truth is, it’s a little of both.
Much like Bernie Madoff’s operation, there is the concept of a trust fund, but there’s really no big investment account somewhere, and no money actually goes into it. Each month, the Treasury Department collects payroll deductions from employers and sends out checks to Social Security retirees. The difference – it’s currently a surplus, remember – gets sent over to the federal government’s general fund, where it is spent like regular tax money on everything from bullets to bridges-to-nowhere.
In exchange for the cash, Social Security gets a special kind of government bond that pays interest based on the following rules, established in October 1960: “The formula sets the rate applicable in a given month to the average market yield on marketable interest-bearing securities of the federal government which are not due or callable until after four years from the last business day of the prior month (the day when the rate is determined) and the average yield must then be rounded to the nearest eighth of 1 percent.”
And they said Eisenhower didn’t have a sense of humor.
Our retirement used to be invested in plain old government bonds, just like the ones regularly sold to the public. The current special bonds are special indeed: They can be released and redeemed only by the Social Security trust fund and are sold solely to the U.S. federal government at interest rates that have dropped continually since 1994 and will average maybe 3 percent this year.
That declining interest has led some people, including former President George W. Bush, to suggest that workers would be better off investing their money elsewhere on their own. They would, but any sizable reduction in contributions to traditional Social Security would push it quickly into bankruptcy and, come to think of it, most of us are not doing that well investing on our own anyway.
As P.J. O’Rourke once put it: Having a government trust fund is exactly like not having a government trust fund.
So what happens in 2018? Assuming that’s actually the date when payments to retirees exceed new contributions, Social Security will have to begin calling its bonds, and the federal government will have to start ponying up on the borrowed benefits and interest, like one gigantic, really ugly balloon payment, except that it’s in continuing waves that go on for decades.
But what if the government can’t afford to pay back the money? Won’t millions of hardworking Americans who put their trust in the system be screwed? No, Virginia, because the government will do what it already does when it needs money to support Medicare, bail out Wall Street or fight a senseless, no-win war in a foreign land. It will reduce other federal spending to come up with the money.
Just kidding! It will borrow it, of course, probably from the Chinese if they have anything left by then.
The much bigger question comes around in 2042 or so, when the system will not only have higher outlays than incomes, but will have run out of bond payments from the government. No one’s really talking about that because, well, 2042 is a long way off and Washington’s current cast will have faded safely into obscurity or the history books.
Whatever the day, I will be eating beef bourguignon through a straw by then, washed down with a sturdy Cotes du Rhone. But you young people should start investing now.
I know a guy with a toll-free number.
John Kominicki is the publisher of Long Island Business News, another Dolan Media publication.