Savings Hurt By Low Interest Rates? So Is Social Security’s, CBO Says

Savings Hurt By Low Interest Rates? So Is Social Security’s, CBO Says

Today’s almost non-existent interest rates on U.S. Treasury bonds are hastening the insolvency of the Social Security Trust Fund, says a new report from the Congressional Budget Office (CBO). The CBO said that the shortfalls for Social Security are larger than those published just last year. About half of the increase in the CBO’s projections of the Social Security deficit has to do with lower interest rates received by the non-marketable I.O.U. bonds held by the Trust Funds.

Here’s why low interest rates matter: According to an explanation provided by the Social Security Administration, taxes earmarked for Social Security benefits are collected in advance of the actual expenditure, and by law the U.S. Treasury immediately issues special non-marketable bonds, or I.O.U.s, to the Social Security Trust Funds. Social Security Trust Funds are essentially loaned to the rest of the government.

By law, the U.S. Treasury must pay current market rate interest on the reserves not used to pay benefits, forming an important component of the Social Security program’s income, the Social Security Administration says. Over the past several decades, a formidable reserve (valued at about $2.8 trillion) of I.O.U.s from the U.S. Treasury has been built up.

What is happening today, however, is the same thing that’s happening to retirees who need a safe place for their savings, like U.S. savings bonds, or bank C.Ds. U.S. Treasury interest rates are so low that the bonds the Social Security trust funds are receiving are literally “worth less” — less in interest than ever before. For example 20-year U.S. Treasury bonds purchased in 1996, maturing this year would yield about 6.50% but the same 20-year bonds purchased today would only yield 2.16%. The Social Security Trust Funds are experiencing the loss of significant interest income in the future. This in turn is eroding program solvency. The following chart illustrates the change in U.S. Treasury yields over the past two decades:

U.S. Treasury Bonds: That Was Then This Is Now

Date U.S. Treasury Yield

3 Mo.

U.S. Treasury Yield

20 Yr.

1996 4.97% 6.50%
2000 5.8% 6.45%
2006 4.60% 4.71%
2008 2.20% 4.65%
2010 0.12% 4.49%
2016 0.32% 2.16%

Source: U.S. Treasury Daily Yield Curves


According to the Social Security Administration, Social Security reforms that improve the Trust Fund finances or cut benefits “will not relieve the accumulated debt commitments of the rest of the federal government.” But in recent years Congress has increasingly balked when faced with lifting the nation’s debt limit to repay those Trust Fund commitments — with some in Congress demanding Social Security benefit cuts in exchange. Debt limit legislation enacted last fall in fact contained surprise Social Security cuts that affected some people already at retirement age.

“Social Security benefits are not a debt reduction bargaining chip,” says TSCL Chairman Ed Cates. “Social Security recipients are in no position to absorb benefit cuts or to continue to supply our government and Congress with a low interest-loan of their future benefits,” Cates says.

TSCL supports legislation that would provide stronger protections of the Social Security and Medicare Trust Funds from the public debt limit. TSCL believes that the program can be strengthened and provide greater economic security for older Americans, ending the taxable maximum wage limit which allows the nation’s highest earners to get a huge tax break on all wages over $118,500. Requiring the wealthiest earners to pay Social Security taxes on all of their wages would ensure program solvency for an estimated 50 years.


Sources: CBO’s 2015 Long-Term Projections for Social Security: Additional Information, Congressional Budget Office, December 2015. “Social Security Trust Fund Cash Flows and Reserves,” David Pattison, Social Security Bulletin, Vol.75, No.1, 2015.