Doylestown Wealth Management - LPL

165 West Ashland Street Doylestown, PA 18901
P: (267) 864 - 2000 | F: (267) 864 - 2010

April 2017 Monthly Budget Commentary

While lately they have been distracted by such shiny baubles as Health Care, Tax Cuts, and Infrastructure, eventually the folks in Washington are going to get around to talking about “saving” Social Security.  This “salvation” comes with a price tag, of course, which generally involves reducing benefits for workers under 60.  However, this approach ignores the reality that Social Security is the most well-funded benefit program administered by the federal government.  In fact, only economic recessions are a serious threat to its solvency—and since recessions will cause ballooning federal deficits anyway, there is no reason to single out Social Security for the fiscal straightjacket.

Source: Social Security Administration


As you can see, Social Security contributions and payments have run on roughly parallel courses over the last twenty years with the exception of the Great Recession.  (While benefits are relatively smooth, contributions fluctuate with federal tax flows month to month.  For this reason, we used a twelve month trailing average.)  The crossover in 2008-10 was due mainly to the job loss that occurred during those years.


As you might expect, FICA contributions to Social Security track withholding tax receipts.

(Observant readers will notice the recent jump in FICA taxes without a corresponding increase in withholding taxes.  We will keep an eye on this in the coming months.)


Contrary to what you might expect, the money withheld from your paycheck for FICA does not go directly into separate accounts (or “trust funds” as they are often referred to).  As the Social Security Administration‘s website puts it:

Employers are not required to distinguish Federal income taxes from Social Security taxes when they deposit taxes with Federal Reserve banks. Thus, Social Security taxes are first deposited in the trust funds on an estimated basis and are later adjusted to reflect actual employment data. By law, Social Security taxes must be based on employment records maintained by the Social Security Administration (SSA), not on the actual amount of taxes collected by the Internal Revenue Service (IRS).

Source: Social Security Administration website—Taxes and Adjustments

That is to say, all of the money withheld from paychecks is deposited into the government’s account at the Federal Reserve Bank.  Then the Social Security Administration estimates how much of the take belongs to them, and, after some negotiations, an agreement is reached with the Treasury and an accounting entry is made “transferring” the money into the “trust funds.”  We have discussed the purely theoretical nature of this transaction elsewhere and will not reiterate it here.  However, it should seem obvious that if the SSA and Treasury wished to “shore up” the Social Security Trust Fund they could simply “transfer” more withholding taxes into it.

This maneuver does have a precedent: in 2011 and 2012, the government reduced the employee portion of FICA from 6.2 to 4.2 percent in an attempt to stimulate consumer spending.  However, the Treasury continued to “transfer” money into the Social Security “trust fund” as if the usual 6.2% rate were still in effect.  One simple way to “save” Social Security would be to “transfer” enough funds into the SSTF such that it would always remain cash flow balanced—that is, contributions plus interest on the “trust fund” would match benefit payments.  This actually would require a relatively small amount of money in relation to the deficit.

Benefit increases in this millennium have been easy to model, amounting to about 3% more than the annual Cost of Living Adjustment (COLA).  Thus, if wages and salaries increase 3% annually in real terms (both through pay raises and additional workers), Social Security funding remains roughly on track.  In short, then, the real danger that Social Security must be “saved” from is the same one that the rest of the federal budget and indeed the country as a whole is trying to avoid—an economic downturn.  Rather than focus on benefit cuts to provide a theoretical balance in the Social Security “trust fund” twenty or thirty years down the road, policymakers would do better to concentrate on preventing a repeat of 2008.


An Apology of Sorts

Last month, this commentary observed the unusual drawdown in the Treasury’s checking account at the Federal Reserve and implied that it was due to either ineptitude or an attempt to score rhetorical points on the part of the new administration.  However, the real reason appears to be neither of those.  Instead, the Treasury was required by law to draw down its cash balance in advance of the March 16 debt ceiling reinstatement.  Apparently the authors of the debt ceiling suspension bill did not want the Treasury to amass a cash hoard prior to the re-imposition of the debt ceiling since this would allow an administration to postpone a showdown on the inevitable negotiations to increase the limit once again.  The casual observer might be forgiven for reaching the conclusion that there are those in Washington who welcome the debt ceiling battles and threatened government shutdowns.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

 Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.