Contributions increased by 11.8% (more people working and salaries increased significantly). Spending increased by 12.0% (with more people reaching retirement age and COLA of 8.7%).
Written by Wolf Richter of Wolf Street.
Total income from all sources The Social Security Administration (SSA) announced today that the U.S. government’s fiscal year ended September 30th amounted to $1.15 trillion, an increase of $111 billion (10.7%) from the previous year, a record high. (green line in the graph). By type of income:
- Due to job growth and significant wage increases in 2022 and 2023, contributions will increase by $110 billion (11.8%) to $1.04 trillion.
- Interest income from trust fund securities decreased $2 billion to $63 billion.
- Taxation on benefits increased by $3 billion to $50 billion.
Total amount spent An 8.7% cost-of-living adjustment, the largest since 1981, and more people reaching retirement age and collecting Social Security benefits led to an increase of $129 billion (12.0%) to a record $1.2 trillion ( red line). Benefits paid accounted for 99.2% of expenditures. His remaining 0.8% consists of transfers to the railroad retirement program ($5.6 billion) and administrative fees ($4.3 billion).
The trust fund has accumulated assets when the green line (total income) exceeds the red line (total expenses). When the green line falls below the red line, the trust fund has shrunk.
Gap between income and expenses was $50 billion, up from a $32 billion deficit in 2022 but down from a $55 billion deficit in 2021, after surpluses in 2020 and 2019.
The first deficit in data dating back to 1987 occurred in 2018 ($19 billion). Previously, annual surpluses generated $2.8 trillion in the trust fund at the time.
Next year’s COLA is 3.2% lower The increase in output slows down. With the release of the CPI data two weeks ago, the CPI-W was also released. This was a metric based on COLA calculations and was quite thin. His COLA of 3.2% in 2024 is negative for retirees, but the deficit will slow, or even produce a surplus if employment and wages continue. Grow at your current pace.
Social Security Trust Fund.
The fund, technically known as the Old Age and Survivors Insurance (OASI) Trust Fund, fell by $50 billion, or 1.8%, during the fiscal year to $2.67 trillion, according to SSA data. Ta.
These figures do not include the Disability Insurance Trust Fund. The Disability Insurance Trust Fund is a separate entity by law from his OASI Trust Fund and is not part of this discussion.
How will trust funds invest $2.67 trillion?.
The OASI Trust Fund invests in interest-bearing Treasury securities and short-term money management securities. These securities, like the popular His I bonds, which many people, including Wolf Street commenters, hold on Treasury Direct, do not trade on the secondary market.
It’s a good thing that securities in a trust fund are not subject to the vagaries and occasional disruptions of the secondary market. The value of these holdings, like the value of your Treasury Direct account, does not fluctuate with market prices. Secondary market. The trust fund holds Treasury securities until maturity, at which time they are paid at face value. Daily price fluctuations are irrelevant to the trust fund.
At year-end, the Trust Fund held $2.47 trillion in interest-bearing special issue Treasury securities and $202 billion in short-term cash management securities (“debt certificates”).
Investing in Treasury securities at the time of issue and holding them until maturity is a low-risk, conservative strategy that essentially eliminates credit risk.
This strategy allows SSA to operate the system with ultra-low management costs of only 0.16% of assets under management.
The Fed’s interest rate suppression created a budget deficit.
In the same fiscal year, the trust fund earned $63 billion in interest on Treasury holdings, down 42% from its peak interest rate in 2010, but the trust fund balance in 2010 was lower than it is today. Ta.
The weighted average interest rate earned by trust funds rose this fiscal year to 2.4% from 2.3% last year, as some low-yield securities in the trust funds began to be replaced by higher-yield securities, but that was still only a slight improvement.
As a result of the Fed’s interest rate restraints that began in 2007, the interest earned by trust funds has been cut by more than half, from 5.1% in 2007 to 2.4% this year.
The Fund invests in long-term securities, and since interest rates on securities do not change until the securities mature and are exchanged for new securities, changes in long-term yields may not be reflected in the “average interest rate.” There is a time lag and is incorporated into the interest income stream.
The average number of years to maturity used to be around 7 to 7.5 years. However, it began to decline from 2020, dropping to a record low of 5.67 years in the fiscal year ending September. In other words, current high-yield securities will be rolled into funds a little sooner.
At current interest rates, the deficit would be eliminated.
If the trust fund had earned an average 5% return on its $2.67 trillion balance this year, it would have earned $133 billion in interest income instead of $63 billion, and the fund would have a $20 billion surplus. It would have been.
Clearly, what trust funds experienced, with the Fed destroying cash flow by suppressing interest rates between 2007 and 2022, is exactly what all yield investors, including retirees, experienced with fixed income investments. It’s the same.
Once long-term Treasury yields normalize in the 4% to 8% range, as was the case from 1990 to 2007 (and even higher over the past two decades), the Fund’s income and expenditure balance will return. But it will take several years for low-yield securities to replace high-yield securities.
If the adjustment is relatively small, lose deficit.
Despite the large COLA of 8.7%, the current difference is not large. This year he is 50 billion dollars, 4% of total revenue. The trust fund still has an accumulated surplus of $2.67 trillion. With a $50 billion annual deficit, it will be years before the fund is depleted. I can do the calculations. Once you run out of money, your benefits will need to be reduced by a percentage of your income, unless you make other adjustments.
Based on the 3.2% COLA, the deficit is likely to narrow further next year. And a combination of relatively small adjustments to the plan, other than higher interest rates, could help rebalance the plan over the coming decades.
Several proposals have been introduced in Congress over the years. And banning QE by the Fed, which should be part of the solution, will do a lot of the heavy lifting.
It will be there, but it will not be enough.
Social Security was never intended to be your sole source of income in retirement. It was designed as a basic income tier to keep people from falling into extreme poverty or worse when they can no longer work. When people retire, there’s Social Security, there’s spousal benefits, there’s survivor benefits. But that’s not enough.
And the COLA over the years isn’t even enough to fully compensate for the loss in purchasing power of retirees’ dollars.
Social Security is designed to be supplemented by other sources of income, such as assets and savings that people have accumulated during their working lives.
Moreover, working as long as possible, even part-time, is very beneficial in all aspects. Our politicians understand that too. They’re working well beyond Social Security retirement age, some even decades beyond full retirement age, and they clearly enjoy it.
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