The Piggy Bank Is Empty... And It Has To Be Paid Back

Almost since the inception of the Social Security system, the program has collected more in taxes than it paid out in benefits. Rather than segregating this excess so that it could be used to pay future obligations, the Federal government diverted this money to its general accounts to be spent on all forms of spending. In return the government gave the Social Security Administration (SSA) special Treasury bonds. This has been a very useful way for the government to spend without needing to raise taxes. It was, essentially, a slight of the hand using brilliant accounting.

Unfortunately it looks like this practice is coming to an end. This year, the government will pay out more benefits than it collects, so the bonds will need to be redeemed. While the SSA has the money to pay out its immediate obligations using their bonds, the Federal government may have a difficult time figuring out how to repay without issuing more debt (or printing money) in its place. This is going to become a huge problem for the Federal government as a major source of funds is drying up and they have debt they have never had to pay before coming due.

The practice of the Federal government repaying SSA bonds is one that will only increase in the coming years. With each year that passes, more individuals will collect Social Security benefits and the system will be strained as this is not offset by additional payroll tax revenue. The SSA will redeem more and more of these bonds thus pulling more and more money away from the general accounts of the Federal government. This debt will almost certainly have to be monetized or refinanced. Any attempts to refinance the SSA debt may be made difficult by (potentially) rising interest rates which will make this a very expensive government endeavor.

The SSA is able to pay its obligations, for now. An additional long term problem that the Federal government may face from the Social Security program is what happens when it becomes insolvent. The SSA can use its bonds to make up its deficits for many years, but not indefinitely. At that point, they will either have to refuse to cover the payments that were promised to workers or to find new money to pay them. The Federal government would become a likely candidate to cover this shortfall (in addition to new taxes).

The headaches that Social Security will cause for the Federal government are about to begin. The government has gotten used to a source of funds that really were not theirs. Now this money needs to be paid back. Not only is the source gone, but the double whammy of having to pay new debts is about to hit as well.