Millions of Social Security recipients are uneasy as the possibility of a U.S. government shutdown looms, unsure of the possible effects of such an occurrence.
While this concern is understandable, it’s crucial to differentiate between two distinct crises: the government reaching its debt limit and a government shutdown resulting from the failure to pass an annual budget.
Separate Funding for Social Security Payments
The earlier threat of the government hitting the debt limit raised concerns about potential delays in Social Security payments, which thankfully were averted at the last minute. However, the current prospect of a government shutdown should not instill the same level of fear, primarily for two reasons.
Firstly, Social Security payments derive their funding from the Social Security trust fund, a separate entity from the regular annual government budget. This trust fund is not subject to the same budgetary constraints, offering a layer of protection for retirees’ benefits.
Secondly, despite media portrayals, a government shutdown is not a complete cessation of operations. Essential government employees remain on the job, and this includes a significant portion of those working at the Social Security Administration (SSA), with 86% of them deemed essential, according to SSA’s analysis in August.
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Potential Benefit Reductions
There is a widespread myth regarding Social Security’s finances that must be dispelled, though. Others contend that the Social Security trust fund is exhausted, however, this incorrect assertion is based on an ignorance of accounting principles.
By law, the SSA invests trust fund assets in U.S. Treasury securities, essentially exchanging cash for bonds, which doesn’t diminish the trust fund’s net worth. The trust fund is far from broke; it holds substantial assets.
To illustrate, consider the Vanguard Treasury Money Market Fund, predominantly invested in U.S. Treasury securities. No one claims this fund is insolvent because the government used its assets. Similarly, the Social Security trust fund is solvent, despite misconceptions.
While the trust fund currently holds approximately $2.83 trillion, it faces a projected actuarial deficit by 2033, as reported by the Social Security chief actuary. This impending funding challenge requires congressional attention within the next decade to ensure the sustainability of Social Security.
Failure to act could lead to a reduction in benefits post-2033, with recipients receiving only around 75% of their entitled benefits.
In summary, the current concern over the 2023-2024 federal budget should not overshadow the larger looming challenge of addressing the Social Security program’s actuarial deficit.
The trust fund remains financially robust, providing reassurance to retirees amidst the turbulence of government budget negotiations.
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