Don’t worry, the impending federal government shutdown will not put your monthly Social Security checks in jeopardy. This is certainly a relief for retirees who, like many of us, struggle to understand the difference between reaching the debt limit and a government shutdown caused by the failure to pass an annual budget.
Earlier this year, we narrowly avoided hitting the debt limit, which could have delayed Social Security payments. However, a government shutdown, which we may be facing now, would not have the same effect. There are two primary reasons for this.
Firstly, the payments for Social Security come from the Social Security trust fund, which operates outside of the regular annual government budget cycle.
Secondly, contrary to how it may be portrayed in the media, a government shutdown is only partial. Essential government employees, including the majority of those who work at the Social Security Administration (SSA), are not furloughed. In fact, 86% of SSA employees fall into this category, as confirmed by an analysis conducted by the SSA in August.
Steve Robinson, the chief economist for The Concord Coalition—a nonpartisan organization dedicated to fiscal policy education and solutions—states that “I think the SS checks are safe—just like during all the previous shutdowns.”
Let’s delve deeper into the first reason as it challenges a long-standing misconception about Social Security’s finances. Many believe that the Social Security trust fund is empty, having been “raided” by the Federal government to fund other programs. I have consistently argued against this false belief, and perhaps a potential government shutdown will serve as further proof that the Social Security trust fund is indeed solvent.
The Misconception About Social Security Trust Funds
There seems to be a widespread misconception about the nature of the Social Security trust fund. This misunderstanding arises from confusion about accounting practices. By law, the Social Security Administration (SSA) is required to invest the trust fund in U.S. Treasury securities. This means that the fund exchanges cash for bonds, resulting in no net impact on its net worth. Therefore, although the trust fund does not hold $2.83 trillion in cash (its size at the end of 2022), it still possesses valuable assets.
To emphasize this point, let’s consider the Vanguard Treasury Money Market Fund as an example. This fund, one of the largest government-only money-market funds, holds a significant $58.3 billion in assets. According to Vanguard, the majority (94.4%) of these assets are invested in U.S. Treasury bills, with 2.2% allocated to other U.S. government bonds and 3.5% held in repurchase agreements. Remarkably, there is hardly any cash in this fund. Nevertheless, no one accuses the Vanguard fund of being broke because the federal government supposedly took all its money and spent it. If skeptics claim that the Social Security trust fund is broke, they should logically apply the same claim to the Vanguard money-market fund.
The Actuarial Deficit
While it is true that the Social Security trust fund currently holds $2.83 trillion, this does not guarantee it will never run out of money. According to recent projections from the Social Security chief actuary, this scenario might occur by 2033. However, it is crucial to note that this actuarial deficit is distinct from the allegation of the trust fund being currently broke.
Congress will need to address this actuarial deficit within the next decade. Failure to do so means that after 2033, Social Security will only be able to pay approximately 75% of the benefits recipients would otherwise be entitled to receive. This impending funding crisis is what Social Security recipients should truly be concerned about, rather than getting caught up in the current debate surrounding the federal government’s budget for the 2023-2024 fiscal year.