Here’s what we heard from the Social Security and Medicare Trustees when they released its annual report on the long-term outlook for these programs:
- Social Security retirement benefits will go down by 23% in 2033.
- The Disability Insurance fund will be insolvent in two years.
Sounds pretty dire, right? Well, the results shouldn't be a surprise.
One of the foremost experts on Social Security in the country, Alicia Munnell, director of the Center for Retirement Research at Boston College, sums up the latest report's outlook as “Not much change from last year.”
What Would It Take?
As expected, the “actuarial deficit” increased a bit, rising to 2.88% from 2.72%. In a nutshell, this rise means if we increased the Social Security tax by that amount, there would not be any problem funding Social Security for the next 75 years.
Currently, the Social Security tax is 12.4%. Employers and employees each pay half, or 6.2%. Raising the tax by 2.88% would bring the payroll tax to 15.28%. If each side kicks in half, workers would pay 1.44% more toward Social Security.
Really? That's all it would take to solve one of this country’s biggest financial challenges?
So how come nobody talks about it in these terms? Just guessing here, but one reason might be that politicians who utter the words “raise taxes” tend to not get elected. It’s much more safe to propose making only certain people bear the cost. Like “The Wealthy.”
But, honestly, wouldn’t most of us be willing to shell out 1.44% more to ensure that for the next 75 years, everyone would get the benefits they’ve earned? Grandma continues to get hers. Your parents get theirs. You get yours.
Remember a couple of years back when we were in the depths of a recession and Congress temporarily reduced the payroll tax by 2%? The hope was that by leaving more money in people’s pockets, they’d spend more and help jumpstart the economy. (We could argue about the effectiveness of this all day.)
For most folks, the amount was so small it barely made a difference. It was another non-event when the Social Security tax eventually went back up to 6.2%. “Nobody appreciated it when it went down and nobody complained when it went back up,” says Munnell. She says this reaction is a a dry run for how folks would react if the Social Security tax were permanently raised by the 1.44% the Social Security trustees say is needed.
The Big Picture
Let’s look at this another way. We measure the size of the economy in terms of gross domestic product. For years, Social Security has equaled about 5% of that amount. The projection is that it will grow to 6%- one percent more- and remain there. “We’ve had defense spending go up and down [by much larger amounts] and it hasn’t been noticeable,” says Munnell.
Translation: In an economy as large as ours, a one percent increase is not a big deal. Virginia Reno, another expert on retirement benefits, agrees.
Folks, this is way easier than fixing the ballooning federal deficit. And, wouldn’t it feel great if one of our nation’s fiscal issues were solved?
Ignoring the Problem for Years
You know why the actuarial deficit went to 2.88% from 2.72%? More than one-third of the increase is due to the fact that Congress did nothing to address this issue in the past year. For decades, Social Security has been collecting more in payroll tax that it needed to pay out in benefits. But each year that we delay addressing the shortfalls projected in the future, a “good” year drops off and a “bad” year- when the numbers don’t look so healthy- gets added into the equation. (The other 0.10% of the increase came from minor adjustments in assumptions and other factors.)
During a press conference Monday, Treasury Secretary Jack Lew said, “Social Security and Medicare are fundamentally solvent and will remain fundamentally solvent in the years ahead.” He added, “Social Security has sufficient funds for the next 19 years.”
The fund that pays out disability insurance benefits is another story. It will be out of money in two years. Once that happens, the only money available to pay benefits will be whatever is collected via payroll tax. This will cover about 81% of the benefits the 11 million folks who receive disability benefits are expecting. So Congress needs to do something--fast.
Given the short amount of time (because this issue has been ignored for 20 years), it is likely Congress will do exactly what it did in the past: order Social Security to fork over some of the money it collects to pay future retirement benefits. Lew admitted that “there’s probably no other alternative”
Do you see how ridiculous this has become?
Medicare Gets [Slightly] Healthier
There was a silver lining to the report: The outlook for Medicare actually improved thanks to slower growth in health-care spending recently. This latest report projects the Medicare fund will now last until 2030- four years longer than predicted last year.
But don’t pull out the noisemakers and balloons just yet. This is just a temporary reprieve.
“Health costs will [continue to] grow faster than workers’ earnings, retirement income or GDP,” according to Robert Reischauer, one of the two trustees who is not a government employee. Indeed, Medicare is a far bigger issue than Social Security benefits. “The sooner lawmakers face reality, the better,” he warns.
"The real issue," says Munnell, is that "when we had more money coming into Social Security than needed, it masked the deficit in the general account.” That’s because Social Security’s surplus and Congress’s spending were combined into a single account. “This reduced the incentives for Congress to behave better.” Which is how members of both parties found a way to spend more, and not increase income taxes all that much.
Now, as the chickens return to the proverbial roost, we are starting to see some of the mathematical games that were played. In less than 10 years, Social Security will need to start redeeming the bonds in the Trust Fund in order to cover the benefits it will have to pay as more baby boomers retire. The U.S. Treasury will have to come up with the cash- either through an increase in taxes or by selling more debt.
Don’t blame Social Security for that.
Congress Needs to Act
Virtually every speaker at the press conference implored Congress to stop sticking its head in the sand and address the tough realities facing the bedrocks of our nation’s retirement system: Social Security and Medicare.
Lew said, “We must make manageable changes now so we don’t have to make drastic changes later.” Acting Social Security Commissioner Carolyn Colvin added, “Lawmakers should act soon to phase in necessary changes.” Charles Blahous, public trustee, said: “It’s getting very late in the game to reach a bi-partisan agreement."
Raising the Social Security tax rate would solve the funding problem for Social Security in one fell swoop. But, this isn’t the only approach. As numerous think-tank papers have explained, making relatively minor adjustments to a number of things would close the gap.
“It’s definitely fixable,” insists Munnell. “This is something we’ve known about it since 1993. By kicking it down the road we have sifted the burden to younger [generations behind the Baby Boomers] and it’s not really fair.”
She urges folks approaching retirement not to start Social Security benefit as soon as they reach age 62 out of concern that the money will run out. “This is a viable program. It’s solid. Don’t claim your benefit early. It will be there for everyone.”
“It’s Congress’ fault. The fact that [they] haven’t acted allows people to be manipulated into being fearful.”
The last time there was a major overhaul of Social Security was in the early 1980s. In 1981 President Reagan was told Social Security would be technically insolvent in two years. Based on this most recent projection, we’ve got 19 years before we’re at the point where the program will not be able to afford the retirement benefits it is obligated to pay. Nineteen years.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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