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Time is Running Out to Fix Social Security

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Time is Running Out to Fix Social Security

July 28, 2015

Last week saw the publication of the annual Social Security and Medicare trustees’ reports, along with an accompanying summary. The occasion was bittersweet for me, these being the last such reports in which I participated as a public trustee on the basis of my term ending last autumn.  It has been a high honor to serve, largely because of the privilege of working alongside the other trustees – most especially my remarkable fellow public trustee Robert Reischauer – as well as the many dedicated, knowledgeable staff who strive so hard to put together these vital annual reports. 

This column summarizes key information from this year’s Social Security report. A follow-up companion piece will do the same for the Medicare report.

Social Security finances are on an unsustainable trajectory requiring legislated corrections as soon as they can be enacted. The essential problem is that the program’s costs are growing faster than its tax base. This is inherently unsustainable and requires correction. The sooner the pace of cost growth can be slowed to a sustainable rate the better, both in terms of equity across generations, and to fix the problem before it becomes intractably large.


Figure 1.



Figure 1 shows how costs are growing rapidly relative to the tax base. The line’s temporary flattening in recent years occurred because some previously projected cost growth arrived ahead of schedule when the Great Recession of 2007-09 depressed system revenues while increasing costs.

Social Security cost growth is driven largely by the beneficiary population growing faster than the worker population, as can be seen from Figure 2.


Figure 2.


The beneficiary-worker growth differential over the upcoming decades is driven largely by a decline in birth rates since the baby boom peak. Figure 3 shows the decline in these birth rates. The generation created by the baby boom is now joining the beneficiary rolls, while the subsequent decline in birth rates is limiting the number of taxpaying workers.


Figure 3.


Additional cost growth is caused because benefit eligibility ages have not been adjusted to reflect our longer, healthier lives (Figure 4). As a result, not only are the numbers of seniors growing, but on average we are each spending a larger portion of our lives as beneficiaries.


Figure 4.


Cost growth is also driven by growth in per-capita benefits (Figure 5). Social Security’s benefit formula was changed via a series of amendments in the 1970s to grow with the national Average Wage Index (AWI), which generally rises faster than price inflation. This is important to know because while we cannot control system demographics (only adjust to them) we can and must implement value judgments about how rapidly benefits and cost burdens should grow. These value judgments have changed in significant ways over Social Security’s history.


Figure 5.


We are running out of time to fix the problem. Maintaining Social Security’s historical financing system requires that lawmakers act to align the program’s benefit schedules with its dedicated revenue stream. If they are unwilling to do so then Social Security must be subsidized from other sources. This could fundamentally alter Social Security, doing away with its historical basis as a benefit earned by worker contributions. For example, benefit programs paid from the government’s general fund are largely financed by those who pay income tax, meaning that benefit amounts are not based on one’s personal tax contributions. Such “unearned” benefits tend to be much more subject to means-tests and sudden changes in eligibility rules, in a way that Social Security has historically escaped. The only way to avert demoting Social Security to the status of other so-called welfare programs is if lawmakers act promptly to repair system finances.

To be effective, such repairs must occur well in advance of the projected trust fund depletion date, and indeed the window of opportunity is already closing. Correcting Social Security’s long-range shortfall today would require measures much more severe than those enacted with so much difficulty during the program’s 1983 financing crisis. The measures required only grow more severe with further delay.

Some illustrations in this year’s report substantiate this point. If legislation enacted today held current beneficiaries harmless, long-range financial balance could be restored by reducing scheduled benefits for future beneficiaries by 19.6%.  If, however, such a strategy were attempted after employing delaying tactics until 2034, by then even 100% elimination of benefits for new claimants would be insufficient to avoid depletion of the combined trust funds.  Further inaction thus compounds the significant problems Social Security already faces, the only worse choice being deliberate action to increase cost growth.

Legislation will be required within the year to prevent benefit disruptions for the disabled. Social Security has two trust funds, one for disability insurance (DI) benefits and the other for old-age (retirement) and survivors’ benefits (OASI).  The financing crisis is already here for DI, with trust fund depletion currently projected for the fourth quarter of 2016.  This threatens sudden 19% benefit reductions for disabled beneficiaries unless lawmakers act swiftly.

Figure 6.

This is a teachable moment and a case study in what happens when responsible action is postponed to the point of impending trust fund depletion. No structural DI reforms can at this late date reduce costs 19% by next year without having an adverse effect on disabled beneficiaries. Similarly, lawmakers show no inclination to raise payroll taxes sufficiently to close the coming DI shortfall.  Hence it is virtually certain that any legislation to avert DI depletion will include at least a partial bailout of DI with funds heretofore allocated to another function.

DI’s situation demonstrates why we cannot afford to continue to delay broader Social Security financing reforms to the point where its retirement fund is also nearing depletion.  Whatever is done with respect to DI must not have the effect of contributing to further delays in these necessary corrections.  Lawmakers may not be able to solve the entire Social Security financing problem in the context of DI solvency legislation, but they should improve its financing outlook by as much as can be agreed to on a bipartisan basis.

No COLA is now projected for this year. The trustees’ reports include much information of interest to lawmakers and the public beyond aggregate financial projections.  One such point of potential interest is the current projection that, due to recent patterns of price increases and decreases, the December cost of living adjustment will be zeroed out.  Despite some misimpressions this is not actually bad for beneficiaries because by law it means they will be held harmless from paying for their proportionate share of rising Medicare Part B expenditures, but the lack of a COLA carries political sensitivities of which elected officials should be aware.

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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