May Newsletter: The Truth About Social Security – Running out of funds? and Prior Fixes

For two decades, we have been hearing that Social Security is going bust!  Back in Clinton’s presidency, we were told the opposite—that his administration was running a surplus. Well, what happened?

Prior fix

I remember the numbers, and if we took out the extra funds we were paying for Social Security, there was no surplus at that time. What actually happened was a hike in payroll tax on both employers and employees. Furthermore, Social Security benefits were delayed for all beneficiaries who were 44 and younger in 1983; because people retiring 21 years later should be able to adjust.  Thus, the benefits became less generous for the silent generation (post-WW II and pre-boomers), boomers and subsequent generations, than it was for prior generations.

There is a simple reason why Social Security was fixed in 1983 and why it is so hard to fix now.  As of January 1, 1983, Social Security was a strict pay-as-you-go system, and the dollars in were going to be less than the dollars out. The WW II generation was retiring in large numbers and the silent generation, boomers, and subsequent generations were the patsies who were dinged.  The claim at the time, which was not the problem, was about paying enough in for seniors. That problem was fixed easily, and the system was supposed to be fixed forever by requiring boomers to start paying more in 1984.

By 2008, when the first Boomers reached 62 and started to receive distributions from the “Social Security Trust Fund,” there should have been sufficient surplus so that Social Security could afford to fund the boomer retirement.  Unfortunately, the calculation was off and the surplus money is projected to fall short of funding all of the boomer’s benefits—just 75% of promised benefits.

Shortfall predicted in 2034

The shortfall won’t be felt until sometime in 2034, which is when the payments in, plus the surplus created by boomers paying extra, runs out. If we are to see history repeat itself, we won’t see a fix till then? Remember, prior to 1983, there were projections stating that  Social Security was going to run out of money, but neither Nixon, Ford nor Carter were willing to fix the problem due to politics (sound familiar?)

A close reading of the Social Security Administration’s Trustee Report projections (https://www.ssa.gov/oact/TRSUM/) shows the meaning of the Social Security trust fund running out of money in 2034. By that time, payroll taxes will account for about 77% of benefits. This number is based on estimates of the number of people earning an income in the workforce, the numbers of Social Security benefits recipients still alive, and the amount of income overall that the workers will be earning, indexed for projected inflation.

In other words, if we don’t fix the system between now and 2034, by then the government will take payroll taxes and turn around and pay this money back to the Social Security beneficiaries. That money is projected to equal about 77% of today’s benefits.

Longevity is declining, but that’s not enough

As more people retire and live longer, the ratio of workers to beneficiaries is expected to gradually decrease. 77% will become 76%, then 75% and gradually shift downward, barring an influx of new workers or unexpected mortality among the elderly.  Recent studies by the US CDC and out of Great Britain show that longevity is declining, which may push the need for a fix out even further by a year or so, but definitely not enough to fix the problem substantially.

Chances are, there will be a fix of some sort between now and 2034, just as there was a fix between 1968 when the problem was first noted, and 1983, when politicians actually shored up Social Security.  What will it look like?

For a successful proposal

From past experience, it must be a bi-partisan effort, with both parties showing wins for their side. Democrats will need to point to the Republicans raising payroll taxes, and Republicans will need to see a reduction in benefits (such as increasing the age of retirement for younger generations) which would be similar to what happened in 1983. To accomplish such a feat, we would need a blue-ribbon bi-partisan committee or panel to make the proposal.

What are we currently seeing?  Something much less than that.  200 Democratic co-sponsors in the U.S. House of Representatives have recently signed on to an expansion of Social Security that would keep the trust fund solvent—and the payments coming—for at least the next 75 years.  The fix increases taxes and does not decrease benefits—it actually increases them.  We know from history (the pre-1983 fixes) that Democrats have tried that before, and it has not worked.

Past politics

For those with good memories, we saw something similar in 2000 when a newly-elected George W. Bush and Republican Congress (majorities in both the House and Senate) proposed privatizing part of Social Security to fix the expected deficit of the 2030s.  This proposal was similar in concept to the Republican proposal prior to 1983.

The deal was a political flop and was dropped, as 911, and wars with Afghanistan and Iraq, overshadowed the country. A few years later the Great Recession of 2008 dominated our attention and for the past ten years the issue of Social Security running out of funds has taken a back burner to current issues.

Current proposal

What is the current Democratic proposal?  The new bill, which is likely to pass the House but unlikely to pass the Senate until/unless the Democrats take control of the Senate, would gradually raise payroll tax rates for both employers and employees, from a current 6.2% to 7.4% over the next 23 years.

In addition, it would immediately raise benefits by 2% for all beneficiaries, and change the CPI (Consumer Price Index) to one that benefited seniors more than the current CPI.  An interesting further twist to the proposal would address one of the anomalies of the payroll tax; that it currently stops at $132,900 of annual income.  That means a person earning $132,900 pays 6.2% of her income, while a person earning $266,000 pays 3.1%, and a person earning over $1 million pays just .77% of total income in payroll taxes.  The legislation would, just like today, stop collecting payroll taxes temporarily at $132,900 (adjusted each year for inflation), but then resume those taxes on all income over $400,000.  It would also gradually raise the 6.2% tax rate to 7.4% by 2042.

In return, all Social Security beneficiaries would receive a 2% increase in benefits, and the benefits would go up a bit faster each year, using the CPI-E index (based on households whose reference person is 62 years of age or older) for inflation, rather than chained CPI (a time series measure of CPI based on the idea that when prices of different goods change at different rates, consumers will adjust their purchasing patterns).  Much of the difference is that the CPI-E calculation is more sensitive to medical inflation and other costs that disproportionately affect seniors.  Higher-income seniors would also get a bit of a tax cut; that is, less of their Social Security benefits would be taxed, using a complex change in an already-complex formula.

Will this work?

Since the current proposal only offers proposals acceptable to one party, Democrats, it is similar to the Bush administration proposal in that it is not bipartisan, and, as such, unlikely to become law.

Not in this proposal, but worth considering, is gradually increasing the age to collect retirement from 67 to 70 for full benefits and allowing extra benefits to be earned by delaying retirement benefits from 70 to maybe 75.  A further idea that the Bush administration proposed was to allow the Social Security trust fund to invest at least some of its assets in equities, which appreciate much faster in value than the current “assets,” which are promissory notes backed by Treasury bills.  Look for a healthy debate on the solvency of Social Security in the next election cycle, however the current proposal is very unlikely from becoming law, as presently proposed.

Sources:

Morningstar

Brookings

Social Security Administration

The Hill

The Atlantic

 

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