Income jumped $105 billion to a record $1.04 trillion as more people worked and earned higher wages, and contributed more.

By Wolf Richter for WOLF STREET.

The balance of the Social Security Trust Fund – technically known as the Old-Age and Survivors Insurance (OASI) Trust Fund – fell 1.2% in the US government’s fiscal year to September 30. , reaching $2.72 trillion, according to figures released by the Social Security Administration. The previous year, the balance had fallen by 2.0%; in 2018, the balance fell by 0.8%. These are the only three declines in the fund balance since 1987.

Despite these declines, since 2010 the fund balance has increased by 12.1%. These figures do not include the Disability Insurance Trust Fund, which by law is a separate entity from the AVS Trust Fund, and is not part of this discussion here.

How the fund is investing that $2.72 trillion.

The AVS trust fund invests in Treasury securities and short-term cash management securities. These securities are not traded in the secondary market, like the I Bonds that many readers have here on

The fact that the securities in the Trust Fund are not subject to the vagaries of the secondary market is a good thing: the value of these holdings – similar to the value of our accounts at TreasuryDirect – does not fluctuate from day to day with the whims. of the secondary market. Since the Trust Fund holds Treasury securities until maturity (when paid at face value), daily price fluctuations are irrelevant, as are our holdings at TreasuryDirect.

At year-end, the Trust Fund held $2.66 trillion in long-term interest-bearing special issue Treasury securities and $57 billion in short-term cash management securities, known as “certificates of trust”. indebtedness”.

Since these securities are not traded on the secondary market, their value is at all times equal to the face value, which is the amount the Fund paid for them when it invested in them, and the amount it will be paid at maturity by the US Treasury. Department.

The strategy of investing in Treasury securities and holding them to maturity is a low-risk, conservative strategy that essentially eliminates credit risk.

This allows the Fund to operate with extremely low administrative costs, amounting to just 0.14% of fund assets.

Interest income crushed by the Fed’s interest rate crackdown.

During the year, the Fund earned $65.1 billion in interest on its holdings of Treasury securities. This interest income was 40% lower than in 2010, the year of peak interest, although the Fund’s balance was much lower at the time. The long-term securities she held paid much higher interest rates than the new long-term securities that replaced them when they matured during the era of the Fed.

Retirees who rely on their fixed income investments, such as CDs and bonds, for extra cash flow have seen even worse devastation to their cash flow following the Fed’s interest rate crackdown which started in 2008.

The gap between income and expenditure is narrowing.

Total revenue from all sources (green line in chart below) jumped $105 billion from a year earlier to a record high of $1.04 trillion in the fiscal year ended September, as more people were working and earning higher wages and contributing more than in the pandemic year:

  • Contributions jumped $98 billion to a record $929 billion.
  • Interest income fell $5 billion to $65 billion (see chart above).
  • Taxation of benefits increased by $13 billion to $47 billion.

Total spending increased by $82 billion to $1.07 trillion (red line). Almost all of this was in the form of benefits paid.

The fund’s shortfall (total income minus total expenses) narrowed to $32 billion from $55 billion the previous year.

When the green line (total income) was above the red line (total expense), the Fund was accumulating assets. When the green line has crossed below the red line, the Fund has decreased:

The costs of the Fed’s interest rate crackdown.

If the Fed had not suppressed interest rates since 2008, interest payments would have roughly kept pace with the increase in the Fund balance, and the Fund would have a surplus.

In 2010, the Fund earned interest at an average rate of 4.4%. In 2022, it earned interest at an average rate of 2.3%. If in 2022 the Fund were still earning interest at an average rate of 4.4%, it would have earned $120 billion in interest, instead of $65 billion, and that additional $55 billion in interest income would have generated a surplus of $23 billion, instead of a deficit of $32 billion. Yield investors across the country were further crushed. Thanks Fed!

Since the Fund invests in long-term securities – the average residual maturity is 6.2 years – and the interest rates on the securities do not change until the securities mature and are replaced by new securities, there is a lag of several years before changes in long-term yields work their way into the “average interest rate” and into the stream of interest income.

Inflation, COLA and reality.

Social Security payments to beneficiaries are adjusted annually for inflation through “cost of living adjustments” (COLA). The COLA percentage is the average CPI-W inflation rate in the third quarter and is applied the following January for the whole year. The Social Security COLA for 2022 was 5.9%, the highest since 1982. The COLA for 2023 will be 8.7%, the highest since 1981.

The massive COLA of 5.9% for 2022 was not enough to overcome CPI inflation which raged at 8.2% in the 12 months to September. The 8.7% COLA has a better chance of at least matching CPI inflation in 2023. But there are no guarantees, and CPI inflation could get even worse.

Depending on where the beneficiaries live and their lifestyle, their actual cost of living may increase faster than the COLA.

Each year the COLA falls behind actual increases in the cost of living, it affects all future years of benefits as inflation and COLAs get worse, and this gap between them gets worse as well. Even small differences year after year turn into big differences after 10 or 20 years.

In other words, if you think you’re comfortable living on your Social Security benefits when you retire, you’ll probably be squeezed 20 years down the road.

Depletion of the Trust Fund: at any time.

In the fiscal year to September 2022, the gap between revenue and expenditure narrowed to just $32 billion. This reduced the Fund less than expected. At this rate, which is unlikely, it would take 85 years to deplete the trust fund.

All predictions of how the next 10 years will unfold – based on estimates for demographics, employment, wages, pensions, mortality, births, immigration, and more. – have been wrong in the past. They are adjusted up or down each year. Nobody knows. This year has been better than expected. If there is a big recession next year, it will be worse than expected.

Several changes could put the Fund back on the path to growth, probably a combination:

  • Long-term interest rates will remain in the current range of 4.3% or higher for many years.
  • Workers pay more, probably via a higher taxable maximum. It is already indexed to inflation and will increase to $160,200 next year; it could be increased more than the inflation indexation.
  • The full retirement age for future retirees could still be delayed, but this causes many problems for people in physical jobs and also due to age discrimination – when it is impossible to find a suitable job.
  • The benefits of future retirees, especially the richest, could be reduced.
  • The inflation measure for COLAs could be modified, for example by replacing the CPI-W with a chain price index, which would impoverish pensioners in increments from year to year, the most insidious way to reduce the benefits later in retirement when people can least afford them.
  • Or a combination of them.

Note that the long-term interest rates that prevailed before 2008 – before the Fed’s QE and interest rate crackdown – would eventually produce enough of an increase in interest income to go a long way towards overcoming the deficit in future years, and not many other adjustments would need to be made to maintain the growth of the fund balance. I’m rooting for the old normal interest rates.

Social security will be there, but it won’t be enough.

Retirees can rely on Social Security, but they shouldn’t rely on it as their only source of cash. Even though they may experience some benefits at first, they will find themselves in a tough spot as COLAs are increasingly outweighed year after year by the rising cost of living that people are actually facing. It gets worse over the years and gets worse over the years.

Social Security was not meant to provide a comfortable retirement on its own, and it will not. Some people move to a less expensive place in the United States. Others move to cheaper countries, which works for a while and can be a lot of fun. But the exchange rate could change against them, and the situation then becomes even more difficult.

For these reasons, it is very important to build up enough savings during the working years. And it can be good for a host of reasons beyond money to extend the years of work, even if it’s just with a part-time gig, maybe even something fun and interesting , which earns extra money.

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