Trustees report finds Social Security trust fund will run out of money in six years, how will Minnesota be affected?
Last week, the Social Security Board of Trustees released its annual report on the financial status of the Social Security Trust Funds. It made for the usual grim reading.
Social Security is a “Pay As You Go” (PAYGO) scheme, where the payments made into the scheme today fund the payments made out of the scheme today. There is no account somewhere with “your” money in it waiting for “you” when you retire.
While total payments in are greater than total payments out, this can work. Indeed, if payments in exceed payments out, you can even build up a “trust fund.”
Since 2021, however, payments out have exceeded payments in. As a result, the trust fund is running down to cover the gap and, the Social Security Board of Trustees forecast, “The [Old-Age and Survivors Insurance] Trust Fund reserves are projected to become depleted in the fourth quarter of 2032.”
As the law currently stands, when that point is reached, there will be an automatic reduction in monthly payments, estimated at around 20% to 24%. A new report from the Committee for a Responsible Federal Budget (CRFB) estimates what that could mean for Minnesota.
“No State Spared: Mapping the Impact of Social Security’s Insolvency” estimates that more than one million Minnesotans – 18% of the state’s population – will see their payments cut by an average of $530 a month. This would represent a total hit of $6.3 billion, or 1.2% of our state’s economy, as Figure 1 shows.
Figure 1
In a PAYGO system, your contribution to your retirement is not the money you pay in but the children and grandchildren you have whose taxes can finance the payments to you in retirement. In 1978, the economist Paul Samuelson wrote:
[O]ur Social Security system is also an actuarially unfunded system…there is no obligation for this generation to have children at the same rate as did previous generations. Therefore, when those born during the baby-boom period of the ‘50s reach retirement age in the next century, their stipends will be felt as more of a burden by the thinner ranks of the then working population.
We can’t say we weren’t warned. The fertility rate fell from 3.7 births per woman in 1960 to 2.1 in 2008. Boomers, to put it bluntly, did not have the children needed to finance their retirements.
Given that we have been aware of this problem for longer than three quarters of Americans have been alive, how has it got right down to the wire like this?
In a political system which “rewards” politicians over horizons of, at most, six years, there has never been any incentive for them to deal with a problem which will not become acute beyond that horizon.
They — and we — no longer have that luxury. Senators elected this November will be in office when the Trust Fund runs dry in late 2032. What are they going to do about it?