Ten years ago, the main concern for the Social Security Trust Fund was that dedicated tax revenues would fall below program costs starting in 2017. That has come to pass. According to the Trustees of Social Security and Medicare, Social Security will run an annual non-interest deficit of approximately $51 billion between 2017 and 2020 after which it will steeply rise.
According to current projections, the Social Security Trust Funds will be exhausted completely in 2034, which is seven years earlier than the Social Security Trustees thought just ten years ago in 2007. What this means for current and future beneficiaries is when the Trust Fund balance reaches “zero” there will be an across the board cut to benefits to match the amount of dedicated Social Security taxes being paid. That cut to current beneficiaries will be as much as twenty-five percent of what they are receiving. The social consequences of such a substantial cut would be disastrous for the millions of seniors dependent on Social Security for their survival.
Social Security will not go bankrupt as some in the chattering class say. The law does not permit the program to pay out more than it takes in through the Old Age and Survivors and Disability Insurance taxes withheld from everyone’s pay. That is why there will be such a dramatic cut in benefits. Congress could choose to make up the shortfall by taking money from general revenues but that is not a sustainable proposition given that Social Security, Medicare, Medicaid, Obamacare, and interest on the debt already consume more than two-thirds of all federal spending.
The problem is exacerbated by the huge wave of Baby Boomers retiring, which has begun and will continue over the next fifteen years. This retirement wave is increasing the cost of Social Security payments just at the time when there are fewer workers coming into the workforce and paying into system. According to the Social Security Administration, there are now fewer than three workers supporting each beneficiary and that number will drop further in the coming decade. Longer life expectancy and lower fertility rates undermine the program even further.
The problem facing Social Security is inherent in its design. The system was created in 1935 as an innovative form of “social insurance” rather than a welfare program and it was based on the premise that there always would be substantially more workers paying into the system than retirees receiving benefits. It also set the retirement age at 65, which, at that time, was the average life expectancy. The theory was that most people would not collect too long or too much and the program designers never anticipated large numbers of beneficiaries collecting payments for twenty years or more.
At the time that Social Security was being designed, a contributory program in which workers provided for their future retirement security by making payments into a system that used the funds to pay current benefits made sense compared to the many radical plans floated during the depths of the Great Depression. The flaw in the design would only become apparent many years later as the number of workers per beneficiary began to decline. In 1940, the first year in which Social Security benefits were paid, there were 159 workers for each beneficiary. By 1950, that ratio had declined to 16.5 workers per beneficiary. By 1960 the ratio had fallen to 4:1, and today there are 2.8 workers for each recipient and that is projected to further decline to only two workers per beneficiary by the year 2030.
In the mid-1990s, Congress passed legislation gradually increasing the retirement age from 65 to 67. While that was a step in the right direction, Congress must act to avert a real crisis which would have devastating effects on not just the beneficiaries of Social Security but all of us.
Clearly, the sooner Congress acts to address these long-range problems the better for the beneficiaries and the taxpayers alike. A combination of further increasing the retirement age, increases in OASDI-dedicated taxes, means testing, and private sector solutions are on the table. As the Trustees say in their report, the projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers. Making adjustments sooner will allow people to plan properly and avoid personal and financial crises.
The Trustees of Social Security and Medicare are Secretary of the Treasury Steven Mnuchin, Secretary of Health and Human Services Dr. Tom Price, Secretary of Labor Alex Acosta, and Social Security Commissioner Nancy Berryhill. There is a vacancy in each of the two Public Trustee positions. Regardless of which party has controlled the White House, the reports of the trustees have been unanimous, bi-partisan, and consistent over time. Congress would do well to heed their advice.