The Truth
About Social Security's Solvency And You
Social Security’s recently
released 2016 Annual Report of the Board of Trustees on the system’s financial condition is 272 pages long
and a doorstop. The report is dense, full of detailed tables and conservative
projections — a policy wonk's dream. The dry recitation of numbers in its
opening sentences are a powerful reminder, however, of just how critical Social
Security's combined Old Age and Disability program is to Americans. Last year,
the program paid benefits to some 60 million people, comprised of 43 million
retired workers and their dependents, 6 million survivors of deceased workers
and 11 million disabled workers and their dependents.
And here's why you should care: The
bottom-line message from the 2016 Trustees report for current and future Social
Security beneficiaries: Social Security isn’t running out of money. (That will
be good news to the 68% of future retirees who worry Social Security will run
out of money in their lifetime; that figure is based on a recent Nationwide Retirement Institute survey.)
It's Not
Going Bankrupt
Social Security isn’t bankrupt.
Social Security will be there when it’s time for younger boomers, Gen
X'ers, Millennials and younger generations to file for benefits.
To be sure, the report said, the
combined Old Age and Disability program will first face a shortfall in
2034 (see the cliff chart below), a projection that's unchanged from last
year's report. Even if the trust fund becomes depleted (a huge "if"
that presupposes Congress doesn't take steps to shore it up), annual revenues
from the dedicated payroll tax and taxation of Social Security benefits will be
enough to fund 74% of scheduled benefits through 2090.
That isn’t a desirable outcome, of
course. But it’s a far cry from the all-too-common refrain that Social Security
is hurtling toward insolvency.
Put somewhat differently, over the
75-year projection by the bipartisan Trustees, the combined program has a
financial imbalance equal to 0.95% of the U.S. Gross Domestic Product. That's a
smaller economic burden than the cost of the wars in Iraq and Afghanistan.
It’s important to remember that the
Trustees actually make three projections, involving different demographic,
economic, and program-specific assumptions. Common practice is to use the
intermediate assumptions, the set that leads to the shortfall in 2034. This
projection assumes U.S. productivity grows at a 1.68% average annual rate and
that unemployment averages 5.5%.
But under the optimistic set of
assumptions— including productivity growth of 1.98% and unemployment at 4.5% —
there never is a shortfall. The fiscal situation deteriorates more rapidly with
the pessimistic scenario, of course, including productivity growth of 1.38% and
unemployment of 6.5%.
The different scenarios are a good
reminder that a vibrant economy where the average worker shares in the bounty
matters a lot when it comes to the future of Social Security.
A Call to
Address the Looming Shortfall
The report's authors also included
their annual plea for Washington legislators to take steps to avoid the looming 2034 problem. “The Trustees recommend that lawmakers address the
projected trust fund shortfalls in a timely way in order to phase in necessary
changes gradually and give workers and beneficiaries time to adjust to them,”
they wrote.
They’re right. Sadly, nothing has
been done to shore up Social Security in polarized Washington, even though
legislators of both parties know what's ahead. This coming year just might
break the logjam, though, largely thanks to the dynamics of the Presidential election.
How the
Election May Turn the Tide
Social Security has been a
backburner issue in the race to the White House so far. But that’s changing. The
signal moment came earlier this month when President Obama urged legislators to
make Social Security more generous. That was something of a reversal. Several
times in his first term, Obama flirted with the idea of striking of grand
fiscal bargain with Republicans that would have included some kind of reduction
in Social Security benefits. No more.
"We can't afford to weaken
Social Security, we should be strengthening Social Security,”
he just said in a speech in Elkhart, Ind. “And not only do we need to strengthen
its long term health, it's time we finally made Social Security more
generous and increased its benefits so today's retirees and future generations
get the dignified retirement that they have earned."
Hillary Clinton, the presumptive
Democratic nominee for the presidency and her rival Bernie Sanders, agree on
boosting Social Security benefits. Clinton takes a more targeted approach,
specifically helping out vulnerable groups, like low-income women. Sanders has
called for an across-the-board benefit increase.
“I like the enthusiasm,” says Alicia
Munnell, director of the Center for Retirement Research at Boston College. “I
also like that recognition that many people have nothing else for their
retirement but Social Security.”
How to pay for improved benefits?
The culprit for almost 40% of the projected shortfall is attributable to the
upward redistribution of income over the last four decades, calculates Dean
Baker, co-director of the Center for Economic and Policy Research in
Washington, D.C. That's why both Clinton and Sanders are keen on raising the
current $118,500 limit on earnings subject to Social Security payroll taxes.
Clinton has been open to that idea
and Sanders has explicitly advocated lifting the cap so everyone “who makes
over $250,000 a year pays the same percentage of their income into Social
Security as the middle class and working families,” according to his campaign
web site.
If the cap is raised (or perhaps
eliminated), odds are the day of a shortfall reckoning will be delayed.
Another option is increasing the
payroll tax itself. The Trustees note that the Social Security system would be
fully solvent over the 75-year time horizon of the report if the payroll tax
went up by 2.58% to 14.98%.
“I’m of the view that the real question
is first, what level of benefits we want and second how do we pay for it?” says
Nancy Altman, founding co-director of Social Security Works.
Trump and
the Republicans
The mystery lies with the
Republicans' answer to Altman’s question.
Republican orthodoxy has been to
describe Social Security as unaffordable, a catastrophic burden. The
conservative rule book with entitlement spending — including Social Security —
is to promote privatizing or partially privatizing Social Security,
means-testing the program, raising retirement age from age 67 for those born in
1960 or later, reducing the annual cost of living adjustment (which the report
forecasts to be a paltry 0.2% in 2017) or some combination of these ideas.
Except Donald Trump, the
presumptive Republican candidate for the presidency, doesn’t buy into the
conservative canon. He likes Social Security (and Medicare) as they are just
fine. “We should not touch Social Security,” he writes in Crippled
America: How to Make America Great Again. “It’s off the table.”
Those lines echo what Trump said
during the March primary debate in Miami. “I will do everything within my power
not to touch Social Security, to leave it the way it is,” he said. “And it’s my
absolute intention to leave Social Security the way it is. Not increase the age
and to leave it as is.” This stance was a key part of his appeal to the
conservative base during the Republican primary.
Medicare's
Outlook
And what about Medicare? The Social
Security Trustees also made a forecast for the health insurance program that covers more than 55 million Americans (mostly 65
and older). Here, the report paints a mixed picture, and a bit darker than last
year's report.
The Trustees now predict Medicare
will exhaust its reserves by 2028, two years sooner than last year’s estimate.
The reason: the actuaries expect higher use of inpatient hospital services,
lower projected improvements in productivity and lower payroll tax revenue due
to slower wage growth.
Here, too, changes could be made to
stave off the forecasted doomday.
Republican Speaker of the House Paul
Ryan wants to gradually increase the Medicare eligibility age from 65 to 67 for
people born after 1960 (matching Social Security). He also proposes providing
beneficiaries with a fixed dollar subsidy to buy their Medicare coverage, a
policy shift that moves the risk of rising health care costs from taxpayers
overall to older Americans in particular.
Whether either of those will happen
will, of course, depend largely on what happens in November 2016.
https://www.forbes.com/sites/nextavenue/2016/06/24/the-truth-about-social-securitys-solvency-and-you/#34e63b7a2199
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