Social Security Slouches Towards Insolvency
Social Security is by far the largest government program, disbursing benefits to 61 million people with total expenditures of $922 billion in 2016. The program continues on its unsustainable fiscal trajectory, highlighted once again by the 2017 Social Security Trustees Report released on Thursday.
The Trustees report that the long-term actuarial deficit has worsened considerably, and America is one year closer to the projected trust fund exhaustion in 2034. Putting Social Security back on sound financial footing requires comprehensive reform, but there is little appetite for discussion of serious proposals. With each year of inaction, the fiscal outlook for the program gets bleaker, and the magnitude of the changes that will eventually have to make get larger and even more highly concentrated on younger generations.
Each year since 2010, Social Security has been operating at a cash flow deficit, meaning the annual costs exceed income from payroll taxes and the taxation of benefits. In 2022, the annual program costs will be more than total income, which also includes interest on the trust fund assets. At this point the trust fund will be drawn down. By 2034, the trust fund will be exhausted, at which point tax income would only be enough to pay for 77 percent of benefits. A person born in 1967 will reach full retirement age in the year the trust fund is projected to run out. Millennials will still have decades left in their working lives when Social Security is exhausted, and will live under a cloud of uncertainty until reforms are enacted.
The reports use a 75-year window for long-range solvency of the program, and the actuarial deficit over this period increased 6.4 percent relative to last year’s report. The present value of unfunded obligations over the 75-year window is $12.5 trillion, about $1.2 trillion more than in last year’s report. Some of the worsening is the changing projection period: as the fiscal situation deteriorates over time, moving the window forward with each successive report worsens the outlook. The shift in the valuation period only accounts for about 29 percent of the increase in the long-term deficit, while the “effects of recently enacted legislation, updated demographic and economic data, and improved methodologies” accounted for the rest of the increase.
Long-term demographic trends are a significant contributor to these problems. Due to the aging of the population and falling fertility rates, there are fewer workers for each beneficiary than in the program’s early years, which strains the financing. In 1950, there were 16.5 covered workers per beneficiary, and last year there were just 2.8. Absent immigration, this ratio will fall even further to 2.1 by 2036.
The imbalance in Social Security’s long-term outlook is predictable and unlikely to change, but that has not translated into a willingness to grapple with Social Security reform in a serious manner. The cost of inaction is high, as conveyed by the new report.
For illustration, to make the program fully solvent through the 75-year projection period, scheduled benefits would have to be immediately and permanently cut by an amount equivalent to 17 percent for all current and future beneficiaries. If no substantial reforms are enacted until the trust fund becomes exhausted in 2034, the benefit reduction would have to be 23 percent. As large as these required changes are, they assume that the reductions would apply uniformly to current seniors and future beneficiaries alike.
Most recent proposals have exempted current beneficiaries from any changes, and if changes are restricted to younger people who are years away from retirement, the reductions would have to be about 20 percent if they were enacted immediately.
One option would be to implement pure price indexing of initial benefits, instead of the average wage index. The Congressional Budget Office recently estimated that this would lead to an approximately 80 percent improvement in the program’s 75-year actuarial balance, the largest effect for any of the 36 options it considered.
In each iteration of the Trustees Report, the fiscal outlook for Social Security worsens. Enacting serious reforms to Social Security will not be easy, and that is likely part of the reason there is a failure to act year after year. This imposes substantial costs on the future generations, who will eventually have to bear the brunt of today’s inaction. Congress and the president need to make some tough decisions to move towards a solution.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.
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