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Is Social Security Really Going Broke?

The just-released report on the long-term outlook for Social Security’s finances contains surprisingly good news: instead of being exhausted by 2033, the Trust Fund will be empty sometime in 2034.

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In addition, the “actuarial deficit” went down slightly from 2.88 to 2.68% of taxable payroll -- a decline of .20%.

Certainly, after years of scary news about Social Security’s worsening financial condition, any move in the opposite direction is welcome. However, when you peel back the curtain and examine the underlying reasons, what you see is less than impressive.  Although the Trustees credit “enacted legislation” as one of the top three things that contributed to the improvement, this is misleading. The reason Social Security’s long-term outlook has grown worse is, in fact, due to a lack of action on the part of Congress. The last time significant legislation was passed to put Social Security’s finances on a more sustainable long-term footing was 1983.

According to Kathy Ruffing, a senior fellow at the Center on Budget and Policy Priorities, 12 factors contributed to the latest improvement in the actuarial deficit, “none bigger than .07%.” Ruffing, who spent 25 years as an analyst in the Congressional Budget Office, says one of the “factors” was an executive order issued by President Obama which would allow undocumented immigrants to remain in the United States and continue working -- and therefore contribute to Social Security. For the record, 1) an executive order is not  legislation and, 2) this one is currently tied up in the courts.  Presumably, the Trustees are counting on this being upheld.

The Not-So-Good News

Social Security has not collected enough in payroll tax to cover the benefits it’s been paying out since 2010. It has made up for the shortfall by using some of the interest it collects on the Treasury Bonds held by the Trust Fund. (By law, Social Security must invest excess its revenue in Treasuries.)  As they said last year, in about 5 years (2020) the Trustees expect to begin gradually selling some of the bonds because at that point the interest alone won’t be enough. 

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By 2034, there will be no Treasury bonds left. At that point, even though it will have used up the reserves it has been building up for decades, Social Security will still be collecting payroll taxes from those in the workforce. These will cover 75% of the benefits it projects it will need to pay out. 

Granted, having three-quarters of the money you need is not an ideal situation. But it is certainly not “broke” or “bankrupt,” which are a couple of the misused terms tossed around to describe Social Security’s financial situation. 

Disability Fund is Hurting

The Trustees did not change their outlook for the Social Security fund that pays Disability Insurance benefits, which has been on life support for years. The DI Trust Fund will run out of money sometime next year. Given the fact that this would result in an immediate 20% cut in benefits, this is one aspect of the report that might actually spur Congress to act. 

None-the less, when this situation has arisen in the past, Congress simply ordered the Social Security Administration to shift money out of the Retirement Trust Fund and into the Disability fund. 

Medicare Is Sick

The Trustees also re-affirmed their prediction that the Medicare Hospital Insurance Trust Fund will no longer have a “cushion” of excess money by 2030. At that point, based on the taxes it collects, there will be enough assets to cover 86% of what it expects to pay out. 

Putting This in Perspective

At this point, you might be thinking one of the following:

a. “I’m filing for Social Security as soon as I can so I can at least get something  out of all those years of contributions.”

b. “Those damn Baby Boomers are bleeding the system dry because there are so many of them.” 

c. “We’re screwed. By the time you and I retire in 25 years there won’t be any Social Security.”

It Wouldn’t Take Much to Fix This

Before you do or say something that you’ll regret later, let’s look at what this report -- written in the language of researchers and statisticians -- really means. The key is the “actuarial deficit.”

First of all, what the heck is an “actuarial deficit?” In layman’s terms, it’s a way of expressing Social Security’s long-term shortfall in terms of the amount of tax it collects. 

The current Social Security tax rate is 12.4%.(1) Unless you are self-employed, you don’t pay the full amount. Instead, it’s split, between you and your employer. 

If nothing is done to address the situation, this report is telling us that the Social Security tax would have to be increased by 2.68% -- the size of the actuarial deficit. In other words:

If employers and employees all kicked in 1.34% more, we would solve the funding problem for Social Security for the next 75 Years!

That’s it. Grandma would continue to get her checks. Mom and Dad would get their benefits. Everyone gets what that they’ve got coming.

The funny thing is, private surveys have shown that when Social Security’s financial shortfall is explained to us in these terms, the overwhelming response is, “Are you kidding me? Is that all we’re talking  about? Count me in!”  

That’s not to suggest that the only way to fix Social Security’s long-term funding imbalance is by raising the tax rate. There have been numerous studies on this topic. In fact, just tweaking a number of the factors that go into Social Security’s formulas would close the gap without making any particular group bear the brunt of the change. 

But the longer we delay, the bigger the adjustment will have to be.

Are you listening, Congress?

1. This does not include Medicare tax.That is 1.45%. (Higher income earners pay an additional amount via the Medicare “surtax.”)

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