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Social Security Will Be Insolvent in 16 Years

Muda69

By Muda69
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Muda69 Grand Master

Muda69

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https://reason.com/2019/04/22/social-security-will-be-insolvent-in-16-years/

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Social Security will be insolvent and unable to pay the full value of promised benefits by 2035—that's one full year later than previously expected—and Social Security's costs will exceed its income by 2020, according to a new report published Monday by the program's trustees.

At the end of 2018, Social Security was providing income to about 67 million Americans. About 47 million of them were over age 65, and the majority of the rest were disabled. If nothing changes, the Social Security Trust Fund will be fully depleted by 2035 and the program would impose across-the-board cuts of 20 percent to all beneficiaries. That may sound like it's a long way off, but 51-year-old workers today will be just hitting retirement age when the cuts kick in. Some current retirees will still be younger than 80.

By that point, some parts of Medicare will already be unable to cover the full cost of benefits.

The trustees' report released Monday shows that the trust fund for Medicare Part A, which covers hospital and nursing home costs, will be gone by 2026. Medicare Part B, which covers routine medical care like visits to the doctor, and Medicare Part D, which covers prescription drugs, are on more solid footing and will remain solvent "indefinitely."

It is important to remember that insolvency is not the same as bankruptcy. By 2026 and 2034, respectively, Medicare and Social Security will not have enough money to pay the full cost of their obligations, but that's not the same as saying they'll have no money at all.

It's also important to keep in mind that these projections are constantly shifting based on economic data, demographic trends, and actuarial projections. Last year, Social Security was supposed to hit insolvency in 2034. The year before, the trustees said insolvency wouldn't hit until 2037. It's a moving target, but time keeps on slipping and ignoring the looming crisis won't make it go away.

Still, Congress could be spurred to action by the threat that Social Security will post losses in just two years. The last time that happened, in 1982, it provided an impetus for federal policymakers to make several changes, including an increase to the payroll tax, that kept the federal old-age pension program solvent. Without policy changes, the new report shows that Social Security would start losing money in 2020 and would continue to operate in the red for decades to come—long past the point when the program would be able to fund its promises to retired Americans.

Right now, there's not much evidence that federal policymakers are ready for that challenge. President Donald Trump has repeatedly promised not to touch Social Security while he's in office, while Democrats in Congress are eyeing Medicare for All proposals that would likely pile massive new obligations onto a federal entitlement program that's already struggling under its own weight.

"That fact that we now can't guarantee full benefits to current retirees is completely unacceptable, and it should be cause enough for every policymaker to rally around solutions to restore solvency to those programs," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan group that advocates for balanced budgets, in a statement. "Certainly we should be focused on saving Social Security and Medicare before we start promising to expand these programs."

What's really needed is a complete reconsidering of the relationship between older Americans and those entitlement programs. Both Social Security and Medicare were designed more than half a century ago for an entirely different workforce and population. 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.

Meanwhile, demographics are blowing up the basic premise of how Social Security is funded. There were 2.8 workers for every Social Security recipient in 2017. That's down from 3.3 in 2007, and that's way down from the 5.1 workers per beneficiary that existed in 1960.

Today, the two programs function mostly as a giant conveyor belt to transfer wealth from the young and relatively poor to the old and relatively rich, allowing the average person (who now lives to be 78) more than a decade of taxpayer-funded retirement.

When and if Congress gets around to doing anything, both programs should be restructured to ensure they take care of the truly needy, rather than being benefits for anyone who has reached an arbitrary age. As Reason's Nick Gillespie and Veronique de Rugy wrote in a still-very-relevant 2012 feature on the future of America's entitlements, "Focusing on those truly in need instead of automatically shoveling out larger and larger amounts to well-off senior citizens is the best way to avert looming fiscal catastrophe and restore some morality to an indefensible system."

Those entitlement programs are also the primary drivers of our national debt, which just hit $22 trillion and is on pace to reach levels not seen since World War II by the end of the next decade.

"Every day that passes, the problem gets bigger and the solutions become more difficult to implement," said MacGuineas.

About the only way Congress will get off the hook is if climate change kills everyone in the next 12 years.

I hope all us us Generation X'ers have a good amount in savings.

 

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Muda69 Grand Master

Muda69

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17 minutes ago, gonzoron said:

What in the world makes you think that? 

Because the fruits of my labor were confiscated by the federal government, in the form of payroll taxes, to pay for it.  It's all my money, isn't it?

 

18 minutes ago, foxbat said:

A simple line change in the law makes it solvent ... change the $132,900 ceiling to all income. 

So raise taxes.

 

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foxbat

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4 minutes ago, Muda69 said:

Because the fruits of my labor were confiscated by the federal government, in the form of payroll taxes, to pay for it.  It's all my money, isn't it?

 

So raise taxes.

 

Actually, just make the tax that currently exists apply the same across all income, not just with a cap at the income around the mid middle-income range.

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Muda69

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1 minute ago, foxbat said:

Actually, just make the tax that currently exists apply the same across all income, not just with a cap at the income around the mid middle-income range.

https://www.forbes.com/sites/ebauer/2018/10/25/social-security-the-fica-tax-cap-and-having-your-cake-and-eating-it-too/#2cf6fe386d3c

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Every time I write about Social Security and its financial woes, I inevitably get comments that the entire shortfall can be solved simply by eliminating the cap on FICA taxes, so that the wealthy pay "their fair share."  After all, the Medicare portion of FICA has already had cap removed, so why not do the same for Social Security?

Here are some key facts:

  • In 2019, the maximum taxable earnings for Social Security will be $132,900, according to recently-released figures.  Below this level, all Americans pay 6.2% of their earned income into Social Security, and their employer pay another 6.2%.  Self-employed workers pay 12.4%.
  • According to The Social Security Game, by the American Academy of Actuaries (it's fun; you should try it), if the cap were eliminated and earnings above the cap were not credited with Social Security benefit accruals, it would make up for 88% of the shortfall.  If high-income workers did receive accruals based on their above-cap pay, it would only make up for 71% of the shortfall.
  • The Social Security benefit formula is structured to be "progressive" -- that is, lower-income earners accrue benefits at a higher rate relative to their income than higher-income earners.  Here's how it works:  all of your income as recorded by the Social Security Administration is indexed, which means it's adjusted to 2018 based on national average wage increases since the year you earned it.  Then the highest 35 years are averaged together (if you had less than 35 years of work, there are 0s included in the average), and then your benefit is 90% of the first $11,112 of your average indexed earnings, 32% of the next level of earnings up to $66,996, and 15% of earnings higher than this level.  (See The Motley Fool for these updated-to-2019 figures.)  It's the same idea as marginal tax rates, except in reverse.  Which means that, while it goes without saying that if high-paid workers simply paid in more taxes without any new accrual, the additional taxes collected simply subsidize everyone else, it's also the case that even if higher earners accrued benefits on this income, they would still be heavily subsidizing lower earners -- otherwise this wouldn't be remedying the shortfall. 
  • Removing the ceiling is consistently popular in polls.  For example, a 2017 poll by the National Committee to Preserve Social Security and Medicare found that 61% of likely voters "strongly" and 13% "not so strongly" favored a proposal to "gradually require employees and employers to pay Social Security taxes on all wages above $127,000, which they don't do now" and an even higher percentage -- 69%/10% -- favored a proposal to "increase Social Security benefits by having wealthy Americans pay the same rate into Social Security as everyone else."  An admittedly-leading question in a  2016 poll found that 72% of respondents supported "increasing -- not cutting -- Social Security benefits by asking millionaires and billionaires to pay more into the system."  And a more academic but somewhat older analysis from 2014 found that 39% of Americans strongly favored and 40% somewhat favored eliminating the cap.

Looking at this can make it appear as if it's a no-brainer to remove the cap.  Only the rich pay, and everyone else benefits.  Yes, they might whine that their taxes go up by 12.4% with nothing to show for it and they're already paying higher rates, but better that than raise taxes across-the-board or force the elderly to cope with benefit cuts.

But what about the conventional wisdom that says that we need to keep the payroll tax cap (and in addition reject means testing) in order to get broad support of the system as one in which everyone contributes their fair share and has earned their benefits rather than receiving welfare?

How can such large proportions of Americans support making a change that fundamentally undoes this "earned benefits" design to Social Security, especially when the conventional wisdom is that Americans believe that, not only have they earned their benefits, but that the money they contributed was set aside to fund their own personal retirement benefits (or, alternately, would have been had Congress not "stolen" it)?

Is this cognitive dissonance?  Are Americans foolishly, even ignorantly, clinging to their belief that they earn their benefits fair-and-square even when their support of removing the cap says they believe the rich should pay for everyone else?  Do they want to have their cake and eat it too, by collecting subsidies while still insisting they've stood on their own two feet all along?

I don't think so.

After all, a 2017 poll found that 48% of Americans support the idea of a universal basic income, up from only 10% a decade ago, when described as a way to help people who lose their jobs due to AI.  Another poll found 38% somewhat or strongly supported a $1,000/month government check paid for with a tax hike on those earning $150,000 or more.

These UBI supporters are still in the minority, but the idea's popularity is increasing, and it appears to be just one way out of many in which people are growing increasingly comfortable with the idea that the middle-class should receive government benefits, not (just) the poor.  And once people are comfortable with the idea of "middle class welfare," then it stands to reason that they'd consider the right solution to the funding deficit to be one requiring the wealthy to top up the system however much is needed?  In such a case, they might be viewing their benefits as "earned" in a more metaphorical/symbolic sense, in which they have a right to them by having been a hardworking American during their working lifetime, regardless of what the math shows.

If the payroll tax cap is removed, it will not be a matter of having the wealthy pay "their fair share."  It will be a shift towards, or a recognition of (depending on your perspective) FICA taxes being taxes, nothing more or less.  And in that case, why not integrate it all into our regular income tax structure, with the same marginal tax rates, deductions, taxation of investment income, and the rest?

Side note:  I tried to find polling on the extent to which Americans understand that Social Security is fundamentally a pay-as-you-go system with modest reserves having been built up by past surpluses, rather than a genuinely prefunded system, and is a system with significant subsidies from one group to another (not just by the benefit formula, but subsidies from singles to families and from dual-earner to single earner couples, as well), but there's not much out there.  Polls intending to determine Social Security knowledge, such as this Mass Mutual survey, ask about such practical items as retirement ages and spousal benefits.  One 2010 survey does ask a more basic question and finds that roughly a quarter of Americans believe that benefits are based on contributions plus interest, one half either answer correctly or a rough approximation of the correct answer -- that is, either an average of the highest 35 years of earnings or a private pension-like 5 year average pay times working years -- and one quarter don't know; it does not ask whether people think the system is funded or pay-as-you-go, or whether they think their benefits are proportionate to their income.  But without more survey questions, we're left to draw conclusions from such sources as viral Facebook posts, including one, a variant on a Snopes-fact-checked version, that came across my Facebook feed recently and insisted, "This is NOT a benefit. It is OUR money , paid out of our earned income! Not only did we all contribute to Social Security but our employers did too ! . . .  This is your personal investment."

 

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Muda69 Grand Master

Muda69

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Just now, gonzoron said:

More flip flopping. It's what we've come to expect.

No flip flopping here Gonzo.   You are the individual who in another thread strongly insisted that Social Security was not a federal entitlement program.  When unequivocally proven wrong, you attempted to duck, dodge, dive, and flip flop.  But it's what I've come to expect.

But hey, as a baby boomer in 16 years you will may very well be dead, and have gotten yours from the federal government who gives a rat's ass about those who follow?

   

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5 minutes ago, Muda69 said:

But hey, as a baby boomer in 16 years you will may very well be dead, and have gotten yours from the federal government who gives a rat's ass about those who follow?

I wonder who the true "baby boomer" is here. You're the one who frequently wants to eliminate programs that you, yourself have already taken advantage of. You got yours and you don't want anyone else to even have a chance to get theirs. Good luck, lol!

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10 minutes ago, gonzoron said:

I wonder who the true "baby boomer" is here. You're the one who frequently wants to eliminate programs that you, yourself have already taken advantage of. You got yours and you don't want anyone else to even have a chance to get theirs. Good luck, lol!

777c905caf1168ac95e38e3e3fbda39a7816feb3

Please name these programs you KNOW I have "taken advantage of".

 

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