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Shaky Social Security Trust Fund May Run Out in 11 Years


Muda69

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https://reason.com/2021/07/14/shaky-social-security-trust-fund-may-run-out-in-11-years/

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For those of us who consider President Franklin Delano Roosevelt more of a political grifter than a policy innovator, it's no surprise that his signature fiscal legacy, Social Security, is in dire financial straits. New data from the Congressional Budget Office (CBO) once again points out that the program, which was crafted from the beginning to meet political needs rather than economic reality, requires either a massive infusion of funds or else drastic cuts to benefits in order to maintain its viability. Of course, Social Security is only part (though a significant part) of the commitments taken on by a federal government committed to fiscal irresponsibility.

"Because the trust funds' revenues are currently lower than their outlays and projected to grow more slowly than those outlays, the Social Security program has a long-term actuarial deficit," a CBO data update noted last week. "Over the next 75 years, if current laws remained in place, the program's actuarial deficit would equal 1.7 percent of GDP, or 4.9 percent of taxable payroll, CBO projects."

 

The problem is that Social Security has been paying out more than it collects from payroll taxes for a decade. To meet its obligations, the program funds benefits from assets held by the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI)—but those funds can only last for so long.

"CBO projected that the OASI trust fund would be exhausted in calendar year 2032 and the DI trust fund in calendar year 2035—again, if current laws remained in place," notes the CBO. "If the funds' balances were combined, the resulting Old-Age, Survivors, and Disability Insurance (OASDI) trust funds would be exhausted in calendar year 2032."

Complicating this, though, is what the Social Security Administration considers to be "assets" on which the trust funds draw: namely, IOUs from the rest of the federal government, which borrowed from the program and long ago spent the money.

Trust fund balances "do not consist of real economic assets that can be drawn down in the future to fund benefits," points out the Cato Institute's Michael Tanner. "Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures."

The federal government itself, let's not forget, is broke. The CBO projects federal expenditures to continue outstripping revenues by an ever-widening gap for the foreseeable future—30 years, at least. So, the trust funds' "assets" are promises of repayments from an Uncle Sam who could only meet the obligation by going even further into debt. And that's without getting into the unfortunate reality that CBO's dire official assessment of federal finances might actually be a tad too rosy. But why introduce such unpleasantness into the conversation?

That said, exhaustion of the trust funds has important implications. "At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 79 percent of scheduled benefits," the Social Security Administration admitted in its 2020 annual report. The inability to meet obligations would only worsen from there with a growing gap between revenues and expenditures.

 

To balance the books, the CBO points out, requires a hike in payroll taxes, cuts in benefits, or some combination of the two. Tax hikes are definitely part of the Biden administration's agenda, but so are plans for trillions of dollars in increased spending. That's not how you balance books already awash in red ink.

Benefit cuts, then, may become necessary to keep Social Security going, says the CBO. To keep the program solvent for 75 years, reductions of 30 percent starting in 2022 would have to be made to the benefits of all current and future beneficiaries. "These reductions would achieve a 75-year OASDI actuarial balance of zero but would not be large enough to prevent exhaustion of the combined trust funds during the period," adds the CBO.

Waiting longer to address the problem would make the pain worse.

From the beginning, the economic calculations behind Social Security have always been shaky. That's not necessarily by design, but certainly out of disregard for dollars-and-cents concerns in a program that was primarily seen as a political project.

"I guess you're right on the economics," FDR told Luther Gulick, an advisor who criticized the use of payroll taxes to fund Social Security. "They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics."

As per FDR's intent, Social Security has proven impossible to kill. It has also demonstrated a remarkable resistance to even modest modification or reform intended to make it conform more closely to financial reality. At this point, it's a Frankenstein monster of a government scheme: wreaking havoc, seemingly unstoppable, and rampaging toward an uncertain fate.

Then again, you could say the same about the federal government itself, which keeps its overall books every bit as divorced from reality as does the Social Security program.

"[F]inancing a large and permanent increase in government spending through perpetual borrowing without any corresponding adjustment in spending or revenues at some point in the future is unsustainable," the CBO warned in March in response to proposals for a much larger and more-active government. But the revenue increases to support such spending have their own costs.

"After 10 years, the level of GDP by 2030 is between 3 percent and 10 percent lower than it would be without the increase in expenditures and revenues," the CBO added. "In those scenarios, younger households experience greater loss in lifetime consumption and hours worked than older households."

Social Security then, with its grandiose promises disconnected from any ability to meet its obligations, is a fitting representative of the federal government by which it's administered. We're all bound to pay a nasty price when the bill for both of them comes due.

Scary stuff.  This is the future we are leaving for our children and grandchildren.  Thanks FDR.  Thanks Boomers.

 

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15 hours ago, DanteEstonia said:

Easy solution- uncap FICA contributions. 

Yes, the "tax the rich" solution all your socialists champion.  Here's a little tidbit for your Dante;  that won't work.  There isn't enough of the "rich" out there, taxed into oblivion, to cover all the debts our government holds.    And now the ponzi scheme that is social security comes to light.  You do realize the FICA taxes you currently pay doesn't go into some government held account that you then have access to when you reach a certain age?  No, that confiscated money comes out of your coffer and almost immediately goes into the coffers of current social security recipients.  It's a wealth transfer, nothing more.

 

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5 minutes ago, DanteEstonia said:

Yes it will. Bezos and Gates have billions. 

It won't be enough. And will cause the likes of a Bezos or Gates to flee the country, along with their assets.   

 As one of the comments to this story states:

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That said, competitive markets ration by price but expand output to meet demand.

The state stokes demand, restricts output and then rations by queue...

 

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27 minutes ago, Muda69 said:

It won't be enough. And will cause the likes of a Bezos or Gates to flee the country, along with their assets. 

As long as they have American citizenship, they will pay FICA, no matter where they live anywhere in the world. 

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13 minutes ago, DanteEstonia said:

As long as they have American citizenship, they will pay FICA, no matter where they live anywhere in the world. 

"flee the country" means renouncing US citizenship.  They own the money they have earned, not the state.
 

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  • 1 month later...

Along the lines of Social Security:

Key Medicare Fund Will Be Insolvent in Just Five Years

https://reason.com/2021/08/31/key-medicare-fund-will-be-insolvent-in-just-five-years/

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Five years.

That's how long until Medicare officially can't pay all of its bills, according to the latest report on the program's fiscal health. After that, without changes, the program will start to miss payments. Medicare is on track for a serious fiscal meltdown. 

First, the gory details: Starting in 2026, the program's Hospital Insurance (HI) Trust Fund, which covers a variety of inpatient hospital services, will be depleted, leaving the fund to operate on a cash-flow basis—and there won't be enough cash coming into the program to pay all of the bills. Instead, the program will be able to pay about 91 percent of its tab, Medicare's Trustees estimate. Without changes to the program's financing structure, that percentage will shrink, leaving Medicare able to cover a smaller and smaller share of the costs associated with the HI fund. 

Medicare already pays less than private insurance in many cases, and it's a major payer for most hospitals. A nearly 10 percent reduction in payments would prove financially devastating to some hospitals, especially those that serve poorer populations, many of which are already struggling to stay afloat. 

No doubt, this will result in some policymakers suggesting that Medicare should be restructured so that it can draw from general revenues, like the program's Supplemental Medicare Insurance (SMI) fund, which pays for outpatient care, physician services, and prescription drug benefits. As the Trustees report notes, the SMI fund is "adequately financed into the indefinite future because current law provides financing from general revenues." 

Essentially, this means it has an unlimited claim on federal funds. And that, in turn, means that it will extract more and more from taxpayers—or, as the Trustees report puts it: Due to "the rapid growth of its costs, SMI will place steadily increasing demands on both taxpayers and beneficiaries." 

The problem, in other words, isn't the particular financing mechanism. It's runaway spending growth and the health program's underlying structure, which does little to meaningfully control costs. 

Looked at one way, Medicare's looming insolvency is hardly news. The program has been fiscally shaky for years now, and last year's Trustees report similarly projected that the HI fund would be depleted in 2026. This year's report just reiterates that the fund is still set to run out of money well before the end of the decade. 

At the same time, the fact that it's not news is itself notable. This is something the political class should be talking about. But they're not.

We've now made it through the 2020 presidential election, which means we are one presidential election away from one of Medicare's key funds becoming insolvent. The next president is going to have to deal with this. 

And yet, unless you're the sort of person who watches budget committee hearings and reads reports about entitlement financing, you've probably heard very little about the shortfall. Certainly, it's hardly been an issue in national politics. 

If anything, both of the last two presidents have promised to not solve Medicare's fiscal problems. Former President Donald Trump repeatedly insisted that he wouldn't raise taxes or reduce spending on Medicare. President Joe Biden, meanwhile, has proposed a substantial expansion of Medicare, adding an array of new benefits as part of the $3.5 trillion budget reconciliation plan now working its way through Congress. Needless to say, Biden's plan to expand Medicare would not fix its looming fiscal woes. 

Indeed, it is notable how little attention has been paid to entitlement financing in recent years. Under President Barack Obama, at least, the interaction between entitlement financing and federal debt and deficits was a live issue. Since total federal debt is essentially a product of annual deficits, and the deficit is merely a measure of the gap between tax revenues and spending, the commissions tended to recommend some combination of tax revenue increases and spending reductions. Tax rates might have to be raised. Entitlements might have to be trimmed. 

Naturally, none of this ever happened. 

And now a major health care entitlement is on track to effectively trim itself in less time than it takes George R.R. Martin to write a book. For Medicare, winter is coming.

Winter indeed.

 

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Social Security Will Be Insolvent in 12 Years

https://reason.com/2021/09/01/social-security-will-be-insolvent-in-12-years/

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The fiscal crisis looming over Social Security is no longer a distant threat. The national pension system will be insolvent by the time workers now in their mid-50s are ready to retire.

The annual report to Congress from the Social Security Trustees, released this week, paints a grim picture of an entitlement program that was already veering towards insolvency before the COVID-19 pandemic accelerated that trend. The Trustees now estimate that Social Security will be unable to pay the full amount of promised benefits by 2033, one year sooner than the same report estimated last year. Absent any policy changes, beneficiaries will receive just 78 percent of what they've been promised starting in 2034.

The pandemic caused a spike in retirements, but the underlying issues with Social Security remain the same as they've been for decades: the math simply doesn't add up.

Social Security will see negative cash flow of $147 billion this year, and the deficits will keep adding up as the population ages and there are fewer workers paying into the system relative to the number of retirees collecting benefits. Last year, there were 65 million Americans getting benefits from Social Security, while 175 million people paid into the system via payroll taxes, according to the Trustees' report. That's less than three workers for every beneficiary, a near-historic low.

Those deficits will eat up the Social Security Trust Fund over the next decade, and insolvency awaits. The trust fund itself is actually an accounting fiction—it contains nothing except IOUs that the government has written to itself over the years. In some ways, then, what the country is really facing is the evaporation of the pleasant fiction of the trust fund as a backstop for its largest entitlement program.

The big question also remains the same: when will Congress take this imminent crisis seriously?

The last time Social Security recorded a deficit, in 1982, it spurred lawmakers to make several changes, including an increase to the payroll tax that funds Social Security, to keep the program solvent for a few more decades. This time, however, there is almost no indication that either major party is prepared to act.

The bulk of Social Security's funding comes from a 12.4 percent payroll tax that's split 50/50 between employers and employees. Only the first $142,800 of income is subject to the tax. Lifting or removing the cap, or raising the tax rate, would generate more revenue for the system. Alternatively, reducing benefits for some or all beneficiaries—either by instituting across-the-board reductions or by means-testing in some way—could bring Social Security's liabilities in line with its assets.

Ensuring Social Security's solvency for the next 75 years would require hiking the payroll tax by 3.36 percentage points today, or making an across-the-board 21 percent cut in benefits.

The more time that passes, the heavier the lift will be. According to an analysis from the Committee for a Responsible Federal Budget, which advocates for low deficits and sustainable entitlement programs, delaying action until insolvency hits in 2034 will make the needed tax increases or benefit reductions about 25 percent larger than if Congress acted today. In either case, the changes will be seriously disruptive to Americans' retirement plans and financial security.

SocialSecurity2021.jpg

Inflation is also going to take a toll on Social Security. The Wall Street Journal reports that senior administration officials believe the program will automatically provide 6 percent cost-of-living adjustments next year. That's significantly higher than the 1.3 percent and 1.6 percent adjustments provided in the past two years.

When Social Security launched in 1935, the average life expectancy for Americans was 61. That means the average person died four years before qualifying for benefits. It was imagined as a safety net for the truly needy, not a conveyor belt to transfer wealth from the younger, working population to the older, relatively wealthier retired population.

Now, the average American lives to 78, more than a decade past the age (67) when they can start collecting Social Security benefits—and 16 years beyond the eligibility age (62) for early retirees to collect partial benefits.

Restoring Social Security to its proper place as an old-age entitlement program and not a national pension system would be a good place for Congress to start. That means raising the eligibility age for benefits. And given the federal government's track record of awful fiscal management, it also makes sense to empower individuals to control more of their retirement savings. Privatizing Social Security—or at least letting individuals opt-out of the program so they can escape the sinking ship—would be a huge win for younger workers who have time to save on their own.

Congress has mostly abandoned any pretense of fiscal sanity, but the math governing Social Security's decline is inexorable. Waiting any longer to take it seriously only invites a bigger mess.

Agreed.  And no @DanteEstonia, just throwing more taxpayer money at SS won't fix it.  It's design is deeply flawed.

 

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I was told back in the mid-80's this was going to happen.  In the early 90's I began taking it seriously that I wouldn't be able to rely on Social Security like my parents did once I retire.  Now in my mid 50's I feel fortunate that I trusted that advice as retirement becomes a closer reality for me.  Privatization is the best option.  (IMHO) 

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On 9/5/2021 at 9:44 PM, psaboy said:

I will sure the U.S. government for stealing my money if I don't get back what I at least put in !!

See how far that goes.

Yeah, only some kind of class action would do anything, although this could be a very large class.

 

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