Currently, US Social Security program payouts slightly exceed income. The difference must be drawn from the Social Security Trust Fund. Projections indicate that this problem will only get worse under current rules. The objective is to determine which rules should be changed in order to insure that the program remains financially viable for the next half century.
This study is limited to the US Social security retirement system (OASI). It does not include the disability system (DI) and its related fund, nor does it include Medicare (MI).
This is not a discussion of the basic merits of the retirement program. It is confined to the analysis of its long term financial viability and what needs to be done to insure it. The study is restricted to a fifty year planning horizon.
When Social Security (Old Age Security Insurance or OASI) was established in the mid 1930’s the average life expectancy was relatively low (at about 65). Over the years much has changed. The average life expectancy has increased to 78. (Disability Insurance or DI) has been added to the responsibility of the Social Security Administration along with Medicare (MI)..
Within OASI, the COLA system of adjusting payments over time to allow for inflation has been added to the program.
In addition to these factors which increase costs, revenues have been increased from time to time by raising the level of income to be taxed. The number of people in the work force has also increased which has increased the revenue significantly over the past several decades. This latter change however, is a two edged sword, although the increased number of workers has helped finance the system, those same workers are now nearing or at retirement age and will be collecting benefits rather than paying into the system. The increase in life expectancy means that many of them will be collecting benefits for a relatively long time. All of this of course is an actuarial problem common to any insurance program.
Recent projections of cost/revenue associated with actuarial analysis indicate that at some point in the not too distant future, the system will become economically unsustainable. See http://www.ssa.gov/oact/trsum/ Currently, this report pretty well covers the subject as of 2016. The report is issued every year so it is possible to go back and see how the picture has changed from year to year.
For instance in 2013, and in reference to the (OASI) the picture was; “After 2020, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of total trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through 2087.”
The following is a cut and paste from the 2016 report;
“What Are Key Dates in OASI, DI, and HI Financing? The 2016 reports project that the OASI, DI, and HI Trust Funds will all be depleted within 20 years. The following table shows key dates for the respective trust funds as well as for the combined OASDI trust funds. 3”
|KEY DATES FOR THE TRUST FUNDS|
|First year cost exceeds income excluding interesta||2010||2019||2010||2015|
|First year cost exceeds total incomea||2022||2019||2020||2021|
|Year trust funds are depleted||2035||2023||2034||2028|
In this 2016 report we have the statement; “The Bipartisan Budget Act of 2015 was projected to postpone the depletion of Social Security Disability Insurance (DI) Trust Fund by six years, to 2022 from 2016, largely by temporarily reallocating a portion of the payroll tax rate from the Old Age and Survivors Insurance (OASI) Trust Fund to the DI Trust Fund. The effect of updated programmatic, demographic and economic data extends the DI Trust Fund reserve depletion date by an additional year, to the third quarter of 2023, in this year’s report. While legislation is needed to address all of Social Security’s financial imbalances, the need remains most pressing with respect to the program’s disability insurance component.”
This essentially says that congress in 2015 authorized the SSA to take money out of the OASI trust fund and put it in the DI fund. They use the term “temporarily” implying that it’s a loan but according to the figures in this report there is little or no probability that the DI trust fund will be in a position to meet its obligations whether we’re talking payment of benefits or repayment of a “Loan”.
Providing a funding plan that will insure the viability of the OASI fund for the next 50 years will obviously require additional income. It may also require some reduction in retirement benefits. At one time, AARP had an interactive on-line model which allowed the user manipulate various benefit changes and revenue changes and see the impact on financial stability of the trust fund. I don’t find it available at this time but I used it to run several scenarios which demonstrated that reasonable changes to both benefits and revenue sources could achieve that objective.
In regard to benefits, some steps were taken a few years ago to raise the retirement eligibility age to 67 from 65 which has helped but it appears that more adjustments will be necessary. At one point the Administration had agreed to a change in the COLA formula which if enacted would cut future benefits somewhat but not painfully. In general, any benefit cuts should be matched by increasing revenue.
In regard to revenue, during my life time, I have seen the cap on income to be taxed grow from about $10,000/yr. to its current level of about $110,000/yr. Why stop there? Removing the cap entirely and taxing all earned income would solve the problem entirely.